A multipronged threat

The National Statistical Office (NSO), on February 28, released the GDP data for the third quarter of the current financial year, which is in line with the Reserve Bank of India's estimate of 4.4 per cent. The GDP in the first quarter of FY 2021-22 was 21.6 per cent, while the GDP in the first quarter of FY 2022-23 was 13.2 per cent. At the same time, the GDP in the second quarter of FY 2021-22 was 9.1 per cent and in the third quarter 5.2 per cent, while the GDP in the second quarter of FY 2022-23 was 6.3 per cent and 4.4 per cent in the third quarter.

The NSO, in its second advance estimate, has predicted a growth rate of 7 per cent in the current financial year. According to the NSO, the GDP at constant prices of the base year 2011-12 is estimated to be Rs 40.19 lakh crore in the third quarter of FY 2022-23, as compared to Rs 38.51 lakh crore in the same quarter of the previous financial year.

The decline in GDP has been recorded largely due to the poor performance of the manufacturing sector. Manufacturing sector output registered a decline of 1.1 per cent in the December quarter, while a growth of 1.3 per cent was registered in the same quarter of the previous financial year. GDP was affected in the June and September quarters due to a weak base.

Inflation has damaged the GDP figures for the December quarter. Despite this, the Indian economy is in a better position as compared to the global economy.

Amidst the questions like whether there will be a recession in India or not, it is important to understand what will be the picture of growth in FY 2023-24. The Union Budget has projected a nominal growth of 10.5 per cent, while the Economic Survey has projected a growth of 6-6.8 per cent. It can be said that the Indian economy can grow at the expected rate if there is no change in the current situation and expectations. There are no signs of recession in India, but the pace of the economy may slow down a bit.

The country's Consumer Price Index (CPI) reached a level of 6.52 per cent in January 2023, which was the highest level in the last 3 months. The reason for the rise in retail inflation is the rise in the cost of food items. For the time being, it is unlikely to come down, because the supply chain is disrupted and the price of fuel is still high.

The central bank has set the lower limit of retail inflation at 2 per cent and the upper limit at 6 per cent. During the current financial year, the Reserve Bank achieved this target only in November and December. Right now, core inflation also remains at a high level.

According to an estimate, the RBI may increase the repo rate by 25 basis points in the monetary review to be held in April 2023. Since inflation is unlikely to come down now, the policy rate may remain elevated for a prolonged period, and if so, growth may remain subdued in the months ahead.

Now, the government is trying to maintain the growth momentum through higher capital expenditure, but has failed to get the expected results. While gross fixed capital formation has increased to 8.3 per cent, private consumption grew by only 2.1 per cent in the December quarter of the current fiscal, which is not a good sign for the economy.

At present, the fiscal situation is also not good. It may take several years for the government to achieve the targets set by the Fiscal Responsibility and Budget Management (FRBM) Act. The government has set a target of bringing down the fiscal deficit to the level of 5.9 per cent of GDP during FY 2023-24. Presently, this deficit is 6.4 per cent of GDP. Therefore, to achieve the target, a reduction of 0.5 per cent in the current financial year is required.

Slow growth leads to a shortfall in tax collection. 2024 is an election year. The fiscal deficit may rise instead of decreasing, as the government may increase expenditure to woo the public.

The government is stressing on capital expenditure. It is necessary because India needs huge investment in infrastructure. Only through this, the vehicle of development can move forward at a fast pace. In such a situation, the government will have to accelerate both capital expenditure and revenue collection, and work towards fiscal consolidation by striking a balance between the two, as there are dangers of strengthening infrastructure by taking more loans. For example, high government borrowing leads to a decrease in private investment, as people perceive that it is the government's responsibility to strengthen infrastructure. Apart from this, paying more interest on the loan hinders the development work. Therefore, it is necessary to keep the fiscal deficit within a reasonable range, but the biggest hurdle in achieving this target is the tax-GDP ratio of 10-11 per cent.

Since the Goods and Services Tax (GST) and corporation tax have already been rationalised, there is little hope of further improvement on this front. In such a situation, the government can emphasise on non-tax revenue and increase the direct tax base.

To sum up, it can be said that due to rising inflation, the RBI may be forced to increase the policy rates in the upcoming monetary reviews and, subsequently, banks too will increase the lending rate and demand will decrease due to costlier loans. Owing to inflation, the spending capacity of the people has also decreased, due to which private expenditure is coming down. Tax collections are also coming down due to slow growth, which was confirmed by GST collections falling below Rs 1.5 lakh crore in February 2023 after a long time. Therefore, to strengthen the Indian economy, the government and the central bank will have to control inflation as soon as possible, the chances of which are not visible at the moment.

Views expressed are personal