Informist, Tuesday, Apr 9, 2024
By Shubham Rana
NEW DELHI - India’s consensus-beating economic growth, the fastest among major economies, is perplexing. The overall GDP expansion for the just concluded fiscal year is estimated close to 8%, investment growth in double digits, but private consumption is seen lagging at about 3%. Economists expect a turnaround in consumption growth in the current financial year started Apr 1, while investment growth is set to remain robust, ensuring what some term a "better quality" of growth.
What has pulled down the private final consumption expenditure to a three-year low of 3.0% in 2023-24? The most often cited answer by economists is poor demand from the rural economy.
Since the COVID-19 pandemic, India's consumption story has been a mixed one – the growth largely driven by urban India with rural demand struggling. "A lot of the weakness in consumption has come from the rural side," Sakshi Gupta, principal economist at HDFC Bank, said.
Rural demand took a hit last year because of high food inflation and lower income due to erratic and below-normal monsoon rains, economists said. Last year, rains during the crucial southwest monsoon season saw a deficit of 5.6%. Food inflation averaged 6.8% in 2023, much higher than the pre-pandemic levels. In 2019, food inflation had averaged 3.8%.
The rural scenario is, however, perking up. "We think rural demand will improve going forward, and there are early signs of that beginning to happen," Gupta said.
Two-wheeler vehicle sales, considered a proxy for rural demand, picked up in the second half of the financial year ended Mar 31. Sales of two-wheeler vehicles surged 25.5% on year in Oct-Feb, as against a growth of 4.1% in the first half of the year, latest data from the Society of Indian Automobile Manufacturers shows.
Food inflation is expected to moderate this year, thanks in largely to a statistical effect of a high base. Monsoon rains are also expected to be normal this year, with private weather forecaster Skymet having today projected southwest monsoon rainfall to be 102% of the long period average during the Jun-Sep season.
"With rural demand catching up, consumption is expected to support economic growth in 2024-25," Reserve Bank of India Governor Shaktikanta Das had said on Friday. "Strengthening of rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in manufacturing and services sector should boost private consumption," Das said after the Monetary Policy Committee's first meeting of the new financial year.
HDFC Bank's Gupta sees a gradual recovery in consumption. "It will be a gentle recovery, things will incrementally be better in 2024-25 compared to 2023-24," Gupta said.
Some economists expect the private final consumption expenditure for 2023-24 to be revised higher when the National Statistical Office releases the provisional estimates for 2023-24 GDP growth on May 31.
"There are several reasons to believe that consumption growth is not as slow as GDP data suggests," Pranjul Bhandari, chief India economist at HSBC, said in a note last month. "Consumer goods imports, personal services, and non-housing personal loans have been rising quickly. We believe the private consumption data will be revised up in subsequent GDP revisions," Bhandari noted.
CONSUMPTION-INVESTMENT WEDGE
India's GDP expansion in 2023-24 has largely been led by robust investment growth, which in turn has been driven by the government's capital expenditure. The government has increased its capital expenditure by more than three times in the past five years. It has set a capex target of 11.11 trln rupees for 2024-25, as against a spending of 3.37 trln rupees in 2019-20.
According to Bhandari, while the government's capex has risen meaningfully, public sector enterprises are cutting back on their capital spending, leaving the overall public investment ratio below pre-pandemic levels. "Instead, it is private investment that has risen, led by 'dwellings & structures'. This chimes well with the rise in house sales and housing loan growth," the HSBC economist said in the report. Bhandari, however, cautioned that it would be premature to call it the start of a new investment cycle at this point, as the other important component of investment, 'machinery and equipment', remains weak.
Broadly, the outlook on private investment appears bright. "The prospects of investment activity remain bright owing to upturn in the private capex cycle becoming steadily broad-based," RBI Governor Das said after the policy review.
According to the central bank, several industries are seeing an improvement in investment activity – sectors such as food processing, beverages and tobacco, textiles, chemicals and chemical products, cement and cement products, iron and steel, electronics, construction, telecommunications, and roads and railways.
While the growth in investment is likely to stay higher than that in consumption, the difference between the two could narrow, Bhandari said. This, she added, would imply that the country’s overall growth is better balanced between consumption and investment than widely believed.
"GDP growth in 2023-24 has been supported a lot by one-off factors," said Anubhuti Sahay, head of South Asia economics research (India) at Standard Chartered. "Inadequate monsoon allowed construction, mining activity to continue unabated and electricity demand increased. Secondly, corporate sector profitability was extremely good because commodity prices fell on a year-on-year basis in 2023-24. Public capex continued at a very strong pace. All these factors supported GDP growth," Sahay said.
While the one-off factors cited above are likely to fade away, leading to a moderation in headline GDP growth from 7.6% in 2023-24 to 7.0% in 2024-25, the quality of growth is likely to be much better, driven by a revival of consumption demand, Sahay said. End
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