Modinomics: 13.5% GDP growth and more

Naysayers claim that even if the RBI’s forecasts for the subsequent three-quarters of FY23 are met, the Central bank’s full-year forecast of 7.2% will be missed by more than 20 basis points. However, there is every reason to believe that RBI’s projections for next three quarters may actually be surpassed.

India’s Gross Domestic Product (GDP) grew at 13.5% in the first quarter of 2022-23 (1QFY23), the fastest pace in four quarters, with the Gross Value Added (GVA) too rising by 12.7%.While 13.5% is lower than the 16.2% GDP uptick projected by the Reserve Bank of India’s Monetary Policy Committee (MPC), the best thing about the solid 13.5% growth is that it is a good 3.8% above pre-pandemic levels. This indicates that not only is the Indian economy sharply back on track but it has regained its pre-pandemic mojo, too. Those claiming that base effect had a role to play, forget that in June 2021 quarter, the GDP growth was 20.1%. If anything, despite a high base effect, the fact that India still logged 13.5% in the June 2022 quarter, makes the GDP number, even more commendable.

GVA from agriculture, forestry and fishing, continued to grow through the pandemic and rose 4.5% in the June 2022 quarter too, yet again, while manufacturing and mining grew at 4.8% and 6.5%, respectively. While share of government final consumption expenditure (GFCE) in GDP moderated to 11.2% from 12.6% last year, GDP growth was boosted by private final consumption expenditure (PFCE),which surged to 59.9% in 1QFY23, from 54% in Q1 of 2021-22 (1QFY22).Gross Fixed Capital Formation (GFCF) which reflects capital investments in the economy improved to 34.7% in 1QFY23,from 32.8% in 1QFY22.In fact, GFCF and private consumption spending in the first quarter of 2022-23,were at their highest levels in the past 10 years, aided by several reforms and steps taken by the Modi government to reinvigorate capital investments and boost consumption.

Share of imports in GDP has jumped to 31% in 1QFY23, from 25.7% in 1QFY22, while the share of exports inched up to 22.9% from 22.7% in the said period. This was the highest share for exports in Q1 of any year since 2014-15, despite supply chain disruptions and slowing global demand.

Compared to the pre-pandemic GDP level of Rs 35.5 lakh crore in the first quarter of 2019-20 (1QFY20), real GDP growth is only 3.8%. While that is true, let no one forget that like rest of the world, India faced two crippling Black Swan events–the COVID pandemic and of course, the Russia-Ukraine war. Both these global events had far reaching ramifications, disrupting global supply chains, global food production, affecting adversely, business confidence and overall global retail, sentiment. Yet, despite so many headwinds one after the other, India’s broad based V-shaped recovery is a testimony to the far-sightedness of Prime Minister Narendra Modi. With over 213 Crore vaccine doses already administered, India has given both doses to its entire eligible adult population. More than 4 crore people in the 12-14 year age group, over 6 crore in the 15-18 year age group and with over 15 crore precaution doses given, PM Modi turned crisis into an opportunity by undertaking bold reforms, when a lesser leader would not have ever dared to do so. A classic example is the decision to sell Air India, which at the rate of Rs 20 crore worth of losses per day, was in any case, nothing but a white elephant.

Coming back to 1QFY23 GDP growth of 13.5%,Public Administration, Defence and other Services which include Education, Health, Recreation, and other Personal Services, these recorded the sharpest GVA growth at 26.3%, followed by Trade, Hotels, Transport, Communication and Services related to Broadcasting, which grew 25.7%.

The consumption demand revival has been uneven but rural demand is now moving ahead at a sound pace. For example, look at the numbers of M&M. While passenger vehicle sales in August grew by a whopping 77%, the commercial vehicle segment also saw a massive growth of 144%, YoY. Tractor demand continued to hold steady. Maruti Suzuki reported a year-on-year (YoY) sales growth of 26.4% in August 2022, after selling a total of 1.65 lakh units (domestic + exports) this month. Not only auto sales, even GST collections have been robust, with GST revenues in August 2022 coming in at Rs 1.44 lakh crore, up 28%,YoY,after a record breaking collection of Rs 1.68 lakh crore in April 2022. There was a generation of 7.6 crore E-way bills in July 2022, which was higher compared to the 7.4 crore in June 2022 and 19% more than 6.4 crore, in June 2021.There are allegations that the 1QFY23 GDP growth has been driven by the Services sector and not Manufacturing. True, Services as measured by PMI, saw a reading of 59.2 in June 2022, the highest print ever in 11 years. That said, manufacturing has begun to take-off, with an uptick in the capex cycle.

Manufacturing growth came in at 4.8% in 1QFY23, after having contracted by 0.2% in March 2022 (4QFY22) quarter. The S&P Global India Manufacturing was steady at 56.2 in August 2022, from July’s print of 56.4, beating market consensus of 55, signaling the second-strongest expansion in the Manufacturing sector since November 2021. Both output and new orders expanded at the fastest pace since last November and new export orders rose at a faster rate too.

With the eight Core industries accounting for 40.3% of the total weight of IIP, IIP growth is in many ways driven by Core sector’s growth. For instance, Core sector and IIP growth in April 2022 stood at 8.4% and 7.1%, respectively. That momentum has continued, largely speaking. For instance, while growth of eight Core sectors was 4.5% in July 2022, a drop from 9.9% expansion seen in July 2021 and 13.2% YoY growth seen in June 2022, a closer analysis reveals that barring Crude Oil output and Natural Gas production, some of the Core sector components rose handsomely in July 2022, with Coal production up 11.4%, Steel up 5.7% and Fertilizer output up 6.2% YoY. Going back to the June 2022 quarter number (1QFY23), the best part of the 13.5% GDP growth is that it is all pervasive. Industry grew by 8.6%, Services by 17.6%, Trade &Hotels rose a massive 25.7%, Construction by a healthy 16.8%, Power & Gas by a good 14.7% and Finance & Real Estate by 9.2%.The GVA growth for mining and quarrying was only 6.5%, seemingly reflecting the impact of the high global commodity prices over the last few months. But now that global commodity prices including Crude Oil prices have started tapering off significantly, positive surprises on the mining front, can be expected going forward. The 25.7% rise in contact sensitive sectors like Trade & Hotels in 1QFY23,after a tepid 5.3% growth in 4QFY22,is by far, the clearest example of how India’s quick paced vaccination drive, prolonged low interest rates and a targeted approach to fiscal stimulus by the Modi government, have worked wonders.

Naysayers claim that even if the RBI’s forecasts for the subsequent three-quarters of FY23 are met, the Central bank’s full-year forecast of 7.2% will be missed by more than 20 basis points. Well, there is every reason to believe that RBI’s projections for next three quarters may actually be surpassed.

Inflation which was 7.79% in April 2022 is already down to 6.71% in July 2022. Food inflation too is down from 8.38% to 6.75%, in this period. It is pertinent to note here that for 23 months till July 2022, Cereal inflation consistently stayed below 6% in India, while rest of the world saw Wheat & Rice prices rising by over 40% in just the last 2 years, in large parts of the globe.

Given declining inflation, the pressure on RBI to raise rates on September 30, 2022, will be much lower and instead of a 50bps Repo rate hike, RBI may end up with a 25-35bps rate hike.

While rate hikes, once they start, are normally front loaded, given that growth has picked up significantly and inflation has started declining meaningfully, India delivering a GDP growth rate exceeding RBI’s own estimate of 7.2% in FY23,may well be on the cards. And that says volumes about India, which at 8.7% was the fastest growing global economy last year and is poised for a repeat, this year too. That India at $3.5 trillion, overtook the UK at $3.2 trillion, to become world’s 5th largest economy, is an endorsement of how PM Modi deftly steered India amidst multipronged challenges in the last few years, without ever losing focus of reforms, financial stability and welfarism.

Sanju Verma is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘The Modi Gambit’.