Growth pangs

The multiple revisions in the gross domestic product (GDP) numbers for the last two fiscals notwithstanding, what is clear is that the economy is decelerating. The 4.4% year-on-year (y-o-y) rise in the GDP in the third quarter of FY23 is not just a three-quarter low; what is even more worrying is that it has happened in what is typically a strong season. Even if one compares this with pre-Covid times, the number is disappointing. Moreover, the GDP grew slower than the gross value added, which clocked 4.6% y-o-y. This may be the result of a jump in subsidies as tax collections have been robust. However, this is somewhat at odds with the consumption numbers which are extremely disappointing. Private Final Consumption Expenditure (PFCE) grew at an anaemic 2.1% for a festival-holiday-wedding quarter, the first such after the pandemic when there were no restrictions on mobility.

While it comes off a growth of 10.8% in Q3FY22, we must remember that the growth in Q3FY21 was just 1.5%. Even if one compares this with the performance in the corresponding pre-Covid quarter, it is poor. Since consumption accounts for more than 55% of the economy, the implications are many. Not only will businesses be under pressure to rein in costs and to limit fresh hiring, companies could postpone capacity addition until there is better visibility. The other worrying aspect of the economy’s report card for the December 2022 quarter is the contraction in the government consumption expenditure—this is the second straight quarter of contraction. If the increase in the gross fixed capital formation (GFCF) at 8.3% appears encouraging, it must be noted that this comes off increases of just 1.2% and 2.6% in Q3FY22 and Q3FY21, respectively. Equally, the contraction in manufacturing for the second straight quarter is disturbing and certainly doesn’t augur well for employment.

In fact, it is surprising that the second advance estimate for the current fiscal year leaves the growth unchanged at 7% even though the growth of exports have been revised downwards. It is possible some of this has to do with the discrepancies and also the revisions in FY22 data. But, going by the commentary of consumption-facing companies, and also the limitations of the government to spend meaningfully over the next few months, a 5% growth in the last quarter of this fiscal year seems unachievable.

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It is evident now that high interest rates are beginning to hurt the economy. The Reserve Bank of India (RBI) needs to rethink its monetary policy approach at a time when aggregate demand is weak and exports are slowing. The rate hikes have been very steep and given effect over a short period. The full impact of the hikes, which is felt with a lag of at least three quarters, needs to be assessed. At this point, if the data points to inflation trending lower, say, six to eight months ahead, that should be good enough for the RBI to pause, even if inflation itself doesn’t fall to 4% or even 5%. As one member of the MPC has pointed out, measured against the forecast for 3-4 quarters ahead, the real interest rate is positive and, quite likely, large enough to moderate demand and keep inflation in control. Speedy transmission of hikes in policy rates could choke demand for retail credit. The central bank must pause; it is time to shift focus to growth.