Number Theory: State of the economy, in five charts | Latest News India
The government will present the Economic Survey on the floor of Parliament on Tuesday. The Economic Survey, which was tabled a day before the presentation of the Union Budget, is the Ministry of Finance’s annual compendium of stylized facts about the state of the economy as well as ideas that the Office of the Chief Economic Adviser (CEA) want to bring to the table. As a precursor to the publication of the survey, here are five charts summarizing the state of the Indian economy.
Growth: what is the extent of the coming slowdown?
While the Survey is largely a commentary on the year that was – the Survey will be for 2022-23, unlike the Budget, which is for 2023-24 – it does speak to the economy’s future growth prospects. For example, the previous year’s survey pegged India’s real GDP growth at 8-8.5% in 2022-23. The National Statistics Office (NSO) estimated India’s GDP growth at 7% in the first advanced estimates released earlier this month. To be sure, NSO’s estimates do not necessarily mean that the Economic Survey overestimated GDP growth in 2022-23, as actual GDP numbers for both 2020-21 and 2021-22 ended up being different than the 2021-22. 22 survey used. And last year’s survey was set up and hosted long before the Russia-Ukraine war. With this caveat in place, it will be interesting to see the survey’s growth rate forecasts for 2023-24. Most institutional forecasts expect a slowdown in the Indian economy’s growth rate in 2023-24. For example, the World Bank’s latest Global Economic Prospects expects a 30 basis point – one basis point is one hundredth of a percentage point – reduction in real growth in 2023-24 to 6.6%. It must be underlined that India is expected to be the fastest growing major economy in both 2022-23 and 2023-24.
See Chart 1: Growth Rate
But manufacturing still struggles
In the Production Linked Incentive (PLI) scheme, the government made a second attempt with its Make in India program to boost manufacturing activity in the country. On February 27, HT reported that the PLI scheme may receive new allocation and expansion in terms of sectors covered in the upcoming budget. However, a look at the manufacturing component of gross value added (VAT) for 2022-23 shows that manufacturing activity continues to struggle in the economy. The GVA of manufacturing is expected to grow by just 1.6% in 2022-23. When read against the fact that the purchasing managers’ index (PMI) for manufacturing has been in the green for months – a PMI value above 50 indicates expansion in economic activity – the weakness in core manufacturing sector growth figures suggests that there is a difference in performance of organized and unorganized manufacturing firms.
See Charts 2A and 2B: Manufacturing GVA and PMI manufacturing
Inflation has eased, but the economy now faces a much higher interest rate environment
Most of the assumptions in last year’s Economic Survey and the Budget were rendered redundant when Russia invaded Ukraine in February 2022. The war in Europe led to a sharp rise in prices of many essential commodities including crude oil and caused disruption to the supply chain. 2022-23 was the first year when RBI missed its official inflation target with the Consumer Price Index (CPI) remaining above the 6% mark for three consecutive quarters. While inflation has moderated significantly and is expected to decline further, RBI has raised the policy rate significantly to boost the credibility of its inflation management role and prevent second-round inflationary spillovers. With most analysts expecting another 25 basis point increase in the policy rate at the February meeting of the Monetary Policy Committee (MPC), the economy will be dealing with a much higher interest rate regime than it has had in the recent past . This will add to growth headwinds due to a slowing global economy.
See Chart 3: Inflation and policy rates
Will consumer sentiment turn positive in 2023-24?
This is the biggest challenge facing economic policy today. RBI’s Consumer Confidence Survey (CCS) shows that the Current Situation Index (CSI) has been negative for 33 consecutive rounds of CCS if one excludes the one-time positive blip just before the 2019 general elections in the March 2019 round of the survey exclude The weakness in consumer sentiment seen in the RBI survey is consistent with the pre-pandemic slowdown in the economy, the pandemic’s economic disruption, and anecdotal evidence of a post-pandemic K-shaped recovery. While consumer sentiment is recovering, it still has some way to go to turn positive. For an economy where private final consumption expenditure has a more than 50% share in GDP, revival in consumer sentiment remains key to promoting growth on a sustainable basis. There is surely little the Survey can say or do to boost consumer sentiment and that is why all eyes will be on the 2023-24 Budget which will be presented on 1 February.
See Chart 4: Current Situation Index of RBI
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