How Indian economy has silenced ‘perennial pessimists’

NRI economists with their Western tinted glasses often seem to revel in India’s economic hiccups, gleefully pointing out every stumble as if it were the end of the world. It’s almost as if they enjoy a bit of economic ‘schadenfreude’ when things don’t go as planned. Yet, the moment India’s economy picks up pace, they turn into forensic auditors, scrutinising GDP calculation methods with the intensity of a detective in a murder mystery. Strangely, these methods are rock solid in their eyes only when the numbers are down. As India’s growth climbs, so does their scepticism — their gloominess seems to rise in direct proportion to India’s economic success. Recently, we cheekily pointed this out in an op-ed in the Economic Times, only to be branded as ‘Perennial Optimists’ — as if stating facts is now a form of optimism! But who can blame us for sticking to the truth? The unveiling of India’s Q2 GDP numbers on November 30 threw a curveball at this pessimistic narrative. India’s economy, much like a Bollywood underdog, surprised everyone with a 7.6 percent growth rate for the July-September quarter, outshining the RBI’s modest 6.5 percent forecast. It’s not just a one-hit wonder either; this number is a leap from the previous year’s 6.2 percent in the same quarter, proving it’s not just a flash in the pan. This robust growth rate is like a reality check for the doom-and-gloom brigade. It’s a testament to the Indian economy’s resilience and potential, shining brightly on the global stage. It shows that the economy, fuelled by a decade’s worth of reforms, isn’t just surviving; it’s thriving, even in the face of global economic headwinds. So, take that, skeptics! The Indian economy isn’t just doing well; it’s doing spectacularly well, and the numbers don’t lie. Irrespective of what perennial pessimists say, this analysis tries to look at data objectively. In analysing the recent GDP figures released by the MoSPI on November 30, 2023, a nuanced perspective emerges, revealing both areas of robust growth and segments that raise concerns. The manufacturing sector demonstrated an unexpected surge, registering a 13.9 percent expansion in Q2, a remarkable rebound from a 3.8 percent contraction in the same quarter the previous year. This uptick, surpassing all projections, indicates a significant recovery, albeit partly aided by a low base effect. Contrastingly, the services and agriculture sectors exhibited sluggish growth, at 5.8 percent and 1.2 percent respectively, during 2QFY24. Notably, sub-sectors like trade, hotels, transport, communication, broadcasting services, and financial services experienced deceleration, contributing to the services sector’s weakest performance in six quarters. The trade, hotels, and transport segment, for instance, plummeted from a 15.6 percent growth rate in Q2 FY23 to a mere 4.3 percent in Q2 FY24. Similarly, financial services slowed down from 7.1 percent to 6 percent over the same period. The construction sector, however, echoed the manufacturing sector’s robust performance, with a substantial 13.3 percent growth, a significant leap from the 5.7 percent seen in Q2FY23. This strong showing by the manufacturing and construction sectors has been pivotal in boosting the overall economy. Examining the demand side, while gross fixed capital formation (GFCF) and government final consumption expenditure (GFCE) showed robust double-digit growth in 2QFY24, private final consumption expenditure (PFCE) only saw modest growth. The PFCE expanded by just 3.1 percent yoy in 2QFY24, while GFCF surged by 11.0 percent yoy, reaching a five-quarter high, suggesting a continued emphasis on government capital expenditures. Despite these gains, there are areas of concern. The deceleration in service sector growth, apparent from the previous quarter, suggests a moderation in pent-up demand, a factor subtly reflected in the GDP numbers. The agricultural sector, too, lagged significantly, recording its slowest growth in 18 quarters in 2QFY24. This slowdown is attributed to a lackluster kharif sowing season, adversely affected by the El-Nino phenomenon. The agricultural sector’s lacklustre performance casts shadows of concern, particularly as it leads to a dip in rural demand. This sector, often regarded as the linchpin of the rural economy, is experiencing a slowdown that could have a domino effect on the overall consumption dynamics. Furthermore, the deceleration of the global economy poses a risk to India’s economic growth, a nation deeply integrated into the fabric of international commerce. The cooling of economic activities in key global markets is a harbinger of potential setbacks to India’s export ambitions and foreign investment inflows. These challenges are exacerbated by global conflicts, such as those in Ukraine and the Middle East, which are exacerbating global inflation. Moreover, the deferred impact of rate increments by the Reserve Bank of India, though initially aimed at tempering inflation, is now contributing to an economic squeeze. The rise in borrowing costs that usually accompany such rate hikes is beginning to dampen consumer spending and investment, further hampering economic growth. In essence, the amalgamation of reduced rural demand, global economic slowdown, and the aftereffects of stringent monetary policy will ensure the growth numbers will not be as good as in the first two quarters. Despite these challenges, the Indian economy’s ability to outperform amidst adversity, as proven by both the Q1 & Q2 growth numbers, is not just an answer to the sceptics; it is also a reaffirmation of the strength and potential that have been meticulously cultivated over the past decade. Aditya Sinha is OSD, Research, Economic Advisory Council to the Prime Minister. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost_’s views._