Wednesday

02


November , 2022
DEMYSTIFYING RECENT MACROECONOMIC TRENDS IN INDIAN ECONOMY
23:20 pm

Dr. Rajiv Khosla


After two years, Diwali and Dhanteras in India got a chance to be celebrated with traditional fervor. There were almost no Covid restrictions and people were flocking to the markets. The government also permitted the usage of eco-friendly crackers.

 

However, the customary Diwali euphoria got somewhat watered down due to weak macroeconomic conditions at the international and national levels. On the international front, the US saw the unemployment rate decreasing, contrary to the expectations of the US Fed that had been aggressively raising the rate of interest to tap inflation. Britain witnessed its shortest serving Prime Minister who resigned after 44 days of assuming charge owing to the irrational and unfunded tax cuts aimed to favor the wealthiest. The Bank of England - like the majority of the central banks worldwide - had to suddenly give up its hawkish stance to become accommodative to facilitate low-cost government borrowings for financing its signature package of £45 billion ($50.6 billion). Romania, France and the Czech Republic are witnessing public protests wherein people are taking to the streets over rising costs, particularly due to the energy crisis. OPEC+ has decided to cut oil output by a massive two million barrels per day implicitly favoring Russia, thereby making it certain of invoking the price cap on Russian oil proposed by the US. Japan has chosen to continue with the easy monetary policy and China’s GDP growth in the third quarter at 3.9% not only remained low, rather well below the official target of around 5.5%. Accordingly, world’s apex organizations like World Bank (WB), International Monetary Fund (IMF), and World Trade Organization (WTO) etc. have expressed a concern over the emerging subdued economic conditions and revised their estimates sharply.

 

India has been no exception. Amid sky-rocketing inflation, falling consumption, grave unemployment and rupee depreciation, the chances of high growth estimates are being revised downwards with each passing day. A glimpse of how India’s GDP growth has been revised downward by different organizations in the last six months is given in table 1. The table clearly indicates that the GDP growth estimates for the year FY23 now hinges from 5.7% to 7.7%, pointing to an average growth of less than 6.8%. India’s own apex bank i.e., RBI downgraded the GDP growth from 7.2% to 7% after the September Monetary Policy

 

Table 1

Revision of GDP Growth estimates in India

(in percent)

Name of the Organization

Earlier Estimates

Revised Estimates

International Monetary Fund (IMF)

7.4

6.8

World Bank (WB)

7.5

6.5

Reserve Bank of India (RBI)

7.2

7.0

Asian Development Bank (ADB)

7.5

7.0

State bank of India (SBI)

7.5

6.8

Citigroup

8.0

6.7

Goldman Sachs

7.2

7.0

Moody’s

8.8

7.7

Fitch

7.8

7.0

India Ratings

7.0

6.9

United Nations Conference on Trade and Development (UNCTAD)

-

5.7

Source: Compiled from different newspapers/websites

 

Committee (MPC) meeting. Infact, many rating organizations revised their growth estimates for India after RBI declared that the October–December quarter will see a GDP growth rate of 4.1% in India while the ensuing January-March quarter may see 4% growth, with inflation for the entire 2022-23 to be at 6.7%.

More worrying signals emanate from the fact that the numbers released in the month of October for Index of Industrial Production (IIP), Purchasing Managers Index (PMI) (Services) and PMI (Manufacturing) did not show any encouraging response despite the fact that production is being carried out in full swing owing the festival season. Infact, IIP data that was released in October for the production carried out in August 2022 was at a 18 months low. Similarly, PMI services and manufacturing, for the month of September remained at a six months and three months low respectively. Reduced production during the normally peak months of production i.e. August and September symbolizes an apprehension of lesser consumption in the future. Consistently high inflation and further an outlook for consumer inflation (6.7%) being more than RBI’s tolerance limit of 6% point out that curtailed purchasing power of the people in general will obstruct their purchases.

It is an acknowledged fact that India’s GDP growth stems from private consumption. To be precise, private consumption expenditure contributes nearly 58% to India’s GDP. Further, in private consumption expenditure too, it is the rural household expenditure that holds the water. Hike in inflation troubles this sector the most, the justification of which is given in table 2.

 

Table 2

Weight of different groups in Consumer Price Index in India

Description

Weights

Rural

Urban

Combined

Food and Beverages

54.18

36.29

45.86

Pan, Tobaaco and Intoxicants

3.26

1.36

2.38

Clothing/footwear

7.36

5.57

6.53

Housing

-

21.67

10.07

Fuel and Light

7.94

5.58

6.84

Miscellaneous

27.26

29.53

28.32

General Index 

100.0

100.0

100.0

Source: Monthly Reports of Ministry of Statistics and Programme Implementation

 

It is evident from the table that most of the spending of rural households is directed towards the food and beverages sector. Due to more weightage, an increase in food inflation severely affects the rural households than their counterparts in the urban sector. The second group which has a high weight in context of the rural sector is the miscellaneous category that consists of expenditure on household goods and services, health, transport and communication, recreation and amusement, education and personal care. Weight of other sectors i.e., fuel and light (7.94%), clothing/footwear (7.36%) and pan, tobacco and intoxicants (3.26%) are relatively low. An analysis of consumer price inflation in India in this financial year (so far) and its impact on rural and urban household consumption is carried out in table 3.

In the first half of this financial year viz. April 2022 to September 2022, consumer price inflation in rural areas remained higher than in urban areas in five out of six months (except in May 2022). Further, the expenditure on food & beverages, clothing/footwear and fuel and light in the rural sector remained higher than the general index (in rural area). In context of inflation in urban areas, it is pertinent to mention that expenditure on


Table 3

Trend in Consumer Price Inflation in India

(in percent)

Description

April 2022

May 2022

June  2022

July 2022

August  2022

September  2022

 

R

U

C

R

U

C

R

U

C

R

U

C

R

U

C

R

U

C

Food and Beverages

8.35

7.72

8.10

7.62

8.10

7.84

7.41

7.88

7.56

6.88

6.85

6.71

7.48

7.64

7.57

8.27

8.61

8.41

Pan, Tobaaco and Intoxicants

3.21

1.39

2.70

1.69

-0.35

1.15

2.01

1.38

1.83

1.85

1.59

1.78

1.84

1.33

1.67

2.10

1.63

1.98

Clothing/

footwear

10.76

8.34

9.85

8.81

8.89

8.85

9.60

9.43

9.52

9.98

9.71

9.91

10.04

9.72

9.91

10.41

9.91

10.17

Housing

-

3.47

3.47

-

3.71

3.71

-

3.93

3.93

-

3.90

3.90

-

4.06

4.06

-

4.57

4.57

Fuel and Light

11.03

10.39

10.8

8.41

11.58

9.54

9.25

12.24

10.39

10.58

13.89

11.76

9.81

12.56

10.78

9.77

11.44

10.39

Miscellaneous

7.72

8.37

8.03

6.08

7.55

6.82

5.88

6.71

6.28

5.53

6.26

5.91

5.70

6.30

 

 

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