We need to understand how India’s growth rate has been accelerating year after year, and especially what fundamental changes have taken place in the economy after 2020-21? We have to also understand what are the main drivers of the high rate of growth in the year 2023-24.
As time passes, international agencies are forced to revise their GDP projections, and for FY25 it is not going to be any different. But this is for sure that India’s GDP growth is destined to go up, riding on new investments and enthusiasm in the economy.
According to the data released by the Central Statistical Organization (CSO), on May 31, India’s real GDP growth was recorded at 8.2% in 2023-24. This is the fastest rate of GDP growth since the year 2015-16, with the sole exception of 2021-22.
During the Corona period, since most of the economic activities had come to a standstill due to the lockdown, the GDP had shrunk by 6.6%. After the negative growth in 2020-21, the GDP growth rate reached 9.7% in 2021-22. Although the growth rate of India’s GDP has remained higher than the growth rate of the world’s major economies for a long time, global rating agencies have kept their stance towards India ‘stable’ for the last 14 years.
However, recently S&P has for the first time upgraded its stance for the Indian economy, from ‘stable’ to ‘positive’. But despite this the agency has kept the credit rating at BBB-/A3. It is expected that the remaining rating agencies will also change their stance and in the future India’s rating will improve further.
Generally, rating agencies did not expect this rate of growth for India, and they were predicting a much lower growth since the beginning of this financial year. With GDP growth reaching 8.2%, defying all economic analysts, rating agencies should be on the receiving end, to explain this growth, which is beyond their projections.
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The special thing about this growth is that it is stable. Generally, there has been a big difference between the growth of GDP at current prices; and GDP at constant prices, due to inflation. Talking about 2022-23, while the rate of growth of real GDP was 7.8 percent, the growth rate of monetary GDP was 14.2%.
But this year, while the rate of real GDP is 8.2%, the growth in monetary GDP has been recorded at 9.6% only. Though, some analysts are questioning the low GDP deflator, because Consumer Price Index (CPI) continues to be high. Growth in GDP at current prices remains subdued at 9.6%, as WPI has been negative (-0.7% average) in 2023-24, against 9.6% in 2022-23; and WPI’s weight is 65 to 70% in calculating GDP deflator,
Though the analysts question the high weight attached to WPI, but this is the legacy issue, and CSO data on GDP growth can’t be questioned on this ground. But this also means that along with the economic growth of the year 2023-24, inflation has also remained largely under control.
We need to understand how India’s growth rate has been accelerating year after year, and especially what fundamental changes have taken place in the economy after 2020-21? We have to also understand what are the main drivers of the high rate of growth in the year 2023-24.
Manufacturing Drives the Growth
First of all, we see that the growth rate of manufacturing has been recorded at 9.9% in the year 2023-24, whereas in 2022-23, the manufacturing sector registered a decline of 2.2%. That is, the industrial sector has made a big comeback this year.
If we see that cement production has increased by 9.0%, coal production by 11.8%, electricity production by 7.1%; and fertilizer production by 3.7%. Steel production has increased by 12.4% and natural gas production has increased by 6.1%. Across the board increase in industrial production indicates that the industrial sector has been the main driver of this growth.
Though agriculture could not show very good results and gross value added (GVA) in agriculture increased by only 2%. However, services have been able to show a growth of 7.7% in gross value addition .
Net Tax Revenues Hit the Target
The second important point is that during the year 2023-24, net tax receipts have been recorded as per the budget estimates. It is worth noting that targeted net tax receipts of Rs. 23.3 lakh crore have been achieved. Here it has to be understood that tax receipts largely depend on monetary GDP.
In the budget for the year 2023-24, monetary GDP growth was projected at 10.5%. But due to an extremely low GDP deflator, monetary GDP would increase only by 9.6%. In such a situation, achieving more than the targeted tax receipts can be considered an achievement.
It’s notable that in 2022-23, net tax revenue growth of 15.6% was experienced with 14.6% growth in GDP at current prices and this year 11.5% growth in net tax revenue, with hardly 9.6% growth in monetary GDP, shows a more buoyant tax system now than before.
This resilience in the tax system gets reflected in the Tax-GDP ratio, at least for the Union government. As compared to the Tax-GDP ratio of 7.6 for 2022-23, we have a Tax-GDP ratio of 7.87 for 2023-24.
Twin deficit: Fiscal prudence and Lower CAD in BOP
Another distinct feature which emerges from the GDP figures for 2023-24, is greater resilience in the Indian economy by way of lower Twin Deficit. Budget Estimates for 2023-24, estimated a fiscal deficit of 5.8 percent of GDP, though the revised estimates would come in Full Budget in July, the data set shows that despite huge capital expenditure, riding on good tax receipts, fiscal deficit may turn out to be lower than estimated, and could be around 5.6% of GDP, much lower than the budget estimate of 5.9%.
On the other hand, with much lower CAD in BOP of merely USD 28 billion in first three quarters and expected surplus in BOP in the last quarter of FY24, overall Current Account Deficit (CAD) in Balance of Payment (BOP) is expected to be around 0.7% of GDP in 2023-24, against more than 2% of GDP a year before.
Lower twin deficit is good news for the economy, industry and masses, as this may help in lowering of interest rates, cooling of inflation and strengthening of rupee.
Can growth slow down?
Despite higher growth registered in FY24, international agencies, including rating agencies have failed to revise their estimates for FY25. It’s notable that India has jumped from GDP growth of 7 percent in 2022-23 to 8.2 percent in 2023-24.
And this year’s growth is riding on a jump in manufacturing growth from a contraction of the manufacturing sector of 2 percent to a growth of 9.9 percent this year. If we go deeper, this manufacturing growth is the result of greater investments in the last three years in almost all sectors in manufacturing, when compared to the earlier period, thanks to the Production Linked Incentives (PLI) scheme and other efforts of the government to increase investment.
Announcement of nearly Rs 1.28 lakh crores of investment in automobile and ancillary industry, Rs 4 lakh crores investment in electronics industry, Rs 18,112 crores in drug and pharma sector and Rs 23,484 crores by food industry in the last three years between 2021-22 and 2023-24, speaks tons about future growth in manufacturing. It’s notable that the announcements of investments in different sectors in the preceding three years is 8 to 102 times more than what it was in the three years before 2021-22.
It seems that international agencies have failed to take into account the efforts under ‘Atmanirbhar Bharat’ and performance of different sectors in light of new investments. Prior to September 2023, Moody’s had projected a GDP growth of only 5.5 percent, for 2023, which it revised to 6.7 percent in September 2023. Projections by other agencies were also around these numbers. Even for FY25, these agencies have projected hardly around 7.0 percent GDP growth.
As time passes, international agencies are forced to revise their GDP projections, and for FY25 it is not going to be any different. But this is for sure that India’s GDP growth is destined to go up, riding on new investments and enthusiasm in the economy.
As the results of General Elections 2024 have ensured the continuation of the present regime under Narendra Modi, Capex by the government and investments by private sector are not going to have any look back, we need to depend more on our efforts and don’t need to go by what rating agencies speak about us, as they will be forced to amend their stance, post facto.
Ashwani Mahajan 