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The 2022-23 fiscal has just ended. One must wait for about two months to have reliable data on the various aspects of the performance of the economy. Some organisations will analyse the economic performance of FY23 based on their own high speed data sources. But before having NSS information on FY 23 some  observations may be meaningful. The foremost thing has been the falling rate of growth of the GDP. In the Q1 of FY23 there was a 13.5% growth. This is apparently a high figure but one must consider it was on the very low base of the Q1 of FY 22, a period after the Covid 19 pandemic. The growth rate stood at 6.3% in Q2 of FY22. In the third quarter it further fell to 4.4%. in the last quarter that is in Q4 the growth rate may fall further, according to the prediction of RBI and some other organisations. A few weeks ago, former Chief Economic Advisor of India and former RBI governor Raghuram Rajan pointed out the alarmingly falling growth rate in an interview with the PTI. But many government persons did not accept his observation and expressed their confidence in the strong fundamentals of the economy. They believed that this was a temporary phenomenon due to the impact of the weak performance of the global economies.

Later, former finance minister, P Chidambaram said that the Indian economy was growing but it had been losing its steam. So, one has to assess the economic performance of FY 23 very objectively and look for the factors affecting the growth of the economy.

High interest rates responsible for lower consumption and investment

The UK hiked its interest rate on March 24, 2023 to 4.25%. The European Central Bank’ rate has increased to 3% and the Fed rate of interest has been increased to 4.75% on February 1, 2023 from 4.4%. Even two years ago, the rate of interest was close to zero in many western countries. Their successive rate hikes during the last few months have made a deep impact in the world economy including the Indian economy. A huge outflow of foreign exchange was experienced in the last few
months.

At present India’s repo rates, the benchmark rate of interest of the commercial banks, is set at 6.5% per year (last updated in February 2023 by the MPC of RBI). It was 6.26% in January 2023. So, the cost of capital has been high now. The real estate sector and automobile sectors have been very anxious in this
situation as EMI cost of the clients would be rising. For other investment
projects, the cost of capital has been a cause for concern. In addition to these, the financial sector, the utility sector, and the insurance sector are also affected by the high interest rates. But the credit growth of the banking system was robust at the end of Q3 of FY 23 compared to the same period of FY 22. The credit growth had been as high as 17%. Loans to industry rose 13.1% to nearly `33 lakh crore as of November 18, according to the reports. The loans to industry grew highest to 21.3%
to about `33.2 lakh crore. Loans to NBFC rose by 33% year-on –year. But it may not last for long if more tightening monetary policy continues for long.

Consumption sector affected most

The consumption spending has been weak during the whole of FY23. One of the main reasons for this has been high unemployment and high inflation, particularly food inflation. It is reported that prices of four key categories in the food basket that together account for more than a fifth of Consumers Price Index, continue to be high compared to those of the last year. The main staple food prices are higher
by 16.7%. The price increase of milk was 9.65% and that for fruit was 6.38% in the
same month compared to those of January 2023. Some private institutes have predicted the possibility of El Nino this year, which has also been a concern for the economy. This will further decrease the consumption expenditure. In that case the GDP may also be affected. A section of economists prefers GST rationalisation and cut in fuel prices as supply side measures to control price stability. Increase
the interest rate cannot be a fruitful option to control inflation in the present context.

The slowing export sector

The trade data of the Indian government in the second week of March shows that both exports and imports are declining for several months. It means that the current account deficit is narrowed. But that is not good news. This may further slowdown GDP if it continues for a longer period. Merchandise export fell by 8.8% in February after declining by 6.6% in January and 3.31% in December. At the same time, import fell by 8.2% in February after falling by 3.1% in January. More worrying is that the core-export which includes export of oil, gold, gems, and jewellery has continued to decline. Sixteen of the main 30 export items fell in February. It means that employment generation may be affected in many sectors. So, the government needs to intervene in these matters to check the fall of GDP and possible stagflation that the Indian economy may face.