The quarterly gross domestic product (GDP) numbers for the first quarter (Q1) of 2023-24 were released on August 31. They show real growth (less inflation) of 7.8% for both GDP and gross value added (GVA) over Q1 of 2022-23 (previous year). This is higher than the estimates given earlier by analysts, RBI and international agencies. It is much higher than what has been achieved by other major economies of the world, whether it be China, the US or Germany. It buttresses the government’s claims of managing the economy well and being a world leader (Vishwaguru).
These claims depend on how accurate the data is. Of late, various top functionaries have questioned the credibility of official data. It has been pointed out that sample surveys that underlie a lot of macro data are now dated since there has been no Census after 2011 while there have been structural changes in the economy since that time. Further, this author has repeatedly pointed out that since 2017, the non-agricultural unorganised sector is not independently measured and is replaced by the organised sector. So, a declining sector replaced by the growing organised sector results in over-estimation of the GDP and other macro data.
For the moment let us leave these errors out of the discussion and focus on the official figures released by the Ministry of Statistics and Programme Implementation (MOSPI). What do they show?
Comparative growth rates
India’s high growth rate in Q1 is a consequence of the steep fall of 23.9% in GDP in Q1 of 2020-21 due to the pandemic. The decline in India was the sharpest among the major world economies. None of the other countries saw the mass migration of people from cities to the villages, as seen in India. A recovery will show a sharp rise in GDP due to the low base. This has been playing out for the last three years. Growth rates in Q1 have been 21.6% in 2021-22 and 13.1% in 2022-23.
It is better to compare the Q1 2023-24 numbers with the pre-pandemic year of 2019-20. So, the average growth in GVA turns out to be 3.5% over the last four years. This was also the growth rate pre-pandemic. So, the trend of low growth seems to be persisting.
Drivers of growth
A look at the expenditure components of GDP, presented in the tables released, show that most components have declined as a share of GDP. Namely, private final consumption, government final consumption, valuables and exports. Imports have risen marginally while Gross Fixed Capital Formation (GFCF) and Change in Stocks (CIS) have remained unchanged. How can most of the shares have fallen unless some share has risen? Indeed, discrepancies as a share of GDP have seen a sharp increase from -3.4% to 2.8%, that is 6.2% of the GDP.
Discrepancies represent the mismatch between the GDP numbers calculated by different methods. These are not a category of GDP expenditure. These are a sum of errors in various expenditure categories. These do not spur growth of the economy as the other expenditures signify. This needs to be further analysed when more data is available.
Usually, discrepancies are supposed to be less than 1%. But, in recent years, in Indian data, these have been large. Like, now they have swung from a large negative number to a large positive one. Effectively, discrepancies are a pointer to errors in the GDP numbers due to methodological deficiencies, especially when there are shocks to the economy, such as demonetisation, structurally faulty goods and services tax (GST) and the sudden lockdown. Such errors in the GDP numbers may suit the government since it would like to show a high growth rate one way or the other.
The drivers of growth in the economy are consumption, investment, government expenditures and net exports. Compared to 2022-23, their shares of the GDP have declined or stagnated. This should dampen growth. It would be better to compare the absolute numbers with the pre-pandemic figures since the previous two years were years of recovery from the shock of the pandemic and also the ongoing Ukraine war and its global impact.
Compared to 2019-20, GDP has grown 13.18%. Private final consumption has risen by 14.3%, government final consumption by 3.8% and fixed capital formation by 13.6%. So, none of these items are giving any boost to the economy. In fact, the government is not at all pulling its weight in raising the growth rate. It should have been the capital formation that should have risen sharply to give the economy a boost.
The contribution of Change in Stocks is -18.4% and that of Valuables is -37.1%. But these are small items compared to the big three items listed above. The other major item is the export surplus. This has also contributed negatively in 2023-24 compared to 2019-20 since imports have risen by 25.6%, while exports rose by 19.4%. So, the trade surplus has turned more negative than earlier and is a negative factor in boosting growth.
The slow growth is due to a shortage of demand consequent to growing inequities which reduces demand at the bottom of the pyramid.
In conclusion, none of the growth drivers are giving a major boost to the economy compared to 2019-20. The current average growth rate of 3.5% over 2019-20, the pre-pandemic year, is close to the pre-pandemic growth rate of 3.1% in Q4 of 2019-20. It had slowed down from 8.1% growth in Q4 2017-18.
Slow growth is due to the government policies which do not lead to an increase in boosting incomes and demand at the bottom. These policies are continuing with the government pushing for growth of the organised sector and capital intensive sectors resulting in high unemployment. Inflation is also pushing down purchasing power at the bottom of the pyramid.
Finally, the good growth rate is largely a result of recovery from the massive decline in GDP in Q1 of 2020-21 due to the pandemic.
Arun Kumar is the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead.