Ours is the fastest growing major economy: How come?

Numerically, there’s no contesting the number, just as our economy clocked high growth in 2017-18 despite demonetization. Also, going by most forecasts, including those of the International Monetary Fund, growth will slow down in 2023-24, but will be in a range of 6-6.5%, which will still be higher than that in all other major economies. So, the Indian growth story will be a winner all the way. The curious part of this 7% expected growth of ours in 2022-23 is that our economy will slow down in the year’s second half. If one goes by Reserve Bank of India (RBI) forecasts, we see a sequential slowing down from 13.5% in the first quarter to 6.3% in the second, and then to 4.6% each in the third and fourth quarters. The last two quarters will be disturbing because in 2021-22, growth was just 5.4% and 4.6%, which should have ideally provided a statistical low base for higher growth this year. But this will not be the case, which is why it is necessary to evaluate what is not right in our economy.

The first issue relates to corporate profitability, which shows how inflation has affected balance sheets. Second-quarter results present a picture of robust growth in sales of non-finance companies by as much as 25-30%, thanks to pent-up demand. However, almost universally profits have declined and the reason is that companies have witnessed high growth in input costs that could not be passed on completely. This also means that the affliction will persist through the rest of the year, as inflation will remain high for the next 3-4 months. The solution is to keep working to bring down inflation.

Second, data once again shows that high inflation (and its mirage of higher consumption) has had a negative effect on savings, which have been under pressure this year. In 2021-22, financial savings came down as per RBI data. The fact that consumption has been steady, yielding good GST collections and boosting company toplines, has been at the cost of savings. It’s the impact of inflation again. This is not good news, given that banks confront the challenge of slower growth in deposits relative to credit. We need to revive savings through suitable tax incentives. The savings decline also means that we will run a large current account deficit (CAD), defined ex-post as the difference between savings and investment. This deficit can be in the region of 3-3.5% of GDP in 2022-23.

Third, exports have been impacted by recessionary conditions in the West. Textiles, engineering, jewellery, chemicals, etc, are some sectors impacted sharply by the slowdown, as demand has come under pressure with a Western combination of low growth and high inflation hurting our exports. While inflation will probably come down in the West too next year, recession-like conditions will persist. Therefore, exporters need to be prepared for a prolonged slack. We need to think differently and take a hard look at the composition and destination of our exports.

Fourth, a sluggish West is a red flag for the software industry. We are already seeing layoffs at Big Tech companies which will get reflected in outsourcing. This is important because both software inflows and remittances support our current account. Our trade deficit will surely widen, as with 7% growth, import demand will hold steady. Exports will remain low key until such time the world economy recovers. Annual software receipts of over $ 120 billion in the past have supported our current account, but a slippage here will be hard to avert.

Fifth, as India’s finance minister pointed out, the private investment cycle needs to pick up. The picture so far is that it’s concentrated in few sectors, like steel and telecom, and is not broad-based. A wider recovery is likely to take time.

Sixth, consumption growth could be an inflation-backed mirage, as several marketers of consumer goods have flagged low rural demand as a concern. Kharif output will be lower for rice and pulses this season, which will impact farmer incomes. Hence, one must be cautious in interpreting signals here.

Seventh, the employment question still hangs in suspension. There is constant debate on whether it is going up or not. The fact that several new-age firms, especially startups, have gone in for layoffs is bad news. Post-covid, many companies have embraced technology for routine processes. Now with profitability under pressure, jobs would be at stake even on the domestic front. We need more openings in the skilled market space, rather than mere delivery jobs at the lower end, to keep consumption ticking.

While we have ambitious goals of joining global supply chains, being relatively aloof has helped us this time, as ours remains the world’s fastest growing major economy. This epithet would not hold once India’s growth gets linked to the fortunes of other countries. Presently, only foreign portfolio and direct investments are vulnerable to external factors, while exports are growth supplements.

In conclusion, we should interpret the title of ‘best growing economy’ with caution. There is still a lot to be done by the government and RBI in providing the right policy environment. But the steering wheel will be in the hands of private investment.

These are the author’s personal views.

Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Lockdown or Economic Destruction’