Growth prospects: Urban-led growth in the offing

Even as consumption revival remains a key theme in FY23, unleashing the full potential of consumption demand will require constant policy effort to create jobs

To clarify, we do not expect a sustained or multi-year revival in investment demand, which requires capacity utilisation above 75% on a consistent basis.
To clarify, we do not expect a sustained or multi-year revival in investment demand, which requires capacity utilisation above 75% on a consistent basis.

By Anubhuti Sahay
A more broad-based growth recovery amid contained infections and faster vaccination bodes well for India’s recovery prospects next year. In fact, upcoming GDP data for Q2FY22 (our forecast: 9.5% y/y) is likely to reaffirm that the economy is on the mend and will likely be back to pre-pandemic levels before end-March 2022. We believe India can grow at another 8% in FY23 after expanding at an estimated 9.5% in the current financial year.

Of course, favourable base effects will play a role in buoying GDP growth to high single digits for two successive years. However, the ongoing recovery, as captured by various high-frequency indicators, shows a normalisation in economic activity.

Drivers of recovery in FY23 are likely to be similar to those in FY22; however, a few nuances should be noted. We highlight and discuss three in specific. First, the composition of growth is likely to become more balanced as investment demand picks up along with a continued revival in consumption demand.


To clarify, we do not expect a sustained or multi-year revival in investment demand, which requires capacity utilisation above 75% on a consistent basis. However, Covid-19-related delays in various projects, planned addition of capacity in select sectors and the government’s continued capex spending is likely to provide a fillip to investment next year, assuming no major disruptions from the pandemic.

Second, even as the consumption recovery is expected to continue, we think urban demand is likely to take the lead. Rural demand has led the current recovery cycle. This was not surprising as rural India was less impacted by the pandemic (the second wave was more severe, but the impact was short-lived), benefiting from higher food prices and government expenditure support.

However, urban demand is likely to accelerate in FY23 on a host of favourable factors, including a better labour-market outlook, a revival in sectors that have lagged so far (such as hospitality), and higher real wages. Based on the CMIE data, around five million people are yet to regain their jobs in both urban and rural areas since the outbreak of the pandemic.

However, job creation is picking up pace in urban areas and is likely to gain further momentum as activity in contact-intensive sectors (hospitality, education, restaurants, and malls) normalises. A few sectors are likely to see better job and income opportunities (for instance, the IT sector), but a broader pick-up is expected to boost purchasing power in FY23.

More importantly, real urban wages are likely to be higher than rural wages. Even if we assume that average inflation in FY23 is similar to FY22’s, the increase in real urban wages relative to rural wages is likely to be more than 5-6x (based on a simple comparison with rural wages and the average urban wage increase as per various HR surveys). Our analysis shows that in the last decade, higher real rural and urban wages took turns to support household consumption expenditure; a re-emergence of this, driven by positive urban real wages, is likely in FY23.

Again, we do not think real urban wages will return to pre-pandemic levels of 4.5-5.5%. Nevertheless, it will be higher than negative real urban wages in FY21 and marginally positive real wages in FY22. In our view, the increase in real rural wages is likely to remain less than 1%, similar to FY22. We note, however, that real rural wages grew at an average of 2% even in the five years preceding the pandemic. Hence, even as the consumption revival is likely to remain a key theme in FY23, driven by higher real wages and normalisation in economic activity in contact-intensive sectors, unleashing the full potential of consumption demand will still require constant policy effort to create jobs at all levels without whipping inflationary pressures.

Third, the role of external demand in driving GDP will likely fall in FY23. In fact, the temporary support from net imports (which turned positive in FY21 on a slowdown in domestic demand and thus imports) has already reverted to the historical trend of being a negative drag on GDP growth since Q4-FY21. With the domestic recovery gaining traction amid higher commodity prices (especially of metals, which we believe is likely to persist at levels higher than 2019 next year too), net imports are set to become a larger drag on growth next year.

Export demand is likely to remain strong, albeit a tad lower than this year as major trading partners see plateauing of pent-up demand. We forecast 2022 global growth (based on 58 countries that we cover) at 4.2% from 5.8% in 2021.

Overall, India’s growth recovery should continue in FY23 assuming no major disruptions. This would make India one of the fastest-growing economies. However, even if India grows at 8% next year, its absolute real GDP size would be lower by an estimated 6% in the absence of the pandemic. The challenge to employ people who were displaced amid the COVID pandemic, along with the annual addition to the labour force, underlines the renewed urgency to implement more job creation policies.

The unexpected outbreak of the pandemic highlights the need to accelerate measures to strengthen health care infrastructure. Last but not least, a faster pace of digital adoption by investing/creating a conducive environment is a necessity, especially as India commits itself to net zero emission by 2070. India has so far held up well economically due to concerted efforts by policy makers and inbuilt resilience. However, there is still a need to step up efforts to meet the medium-term potential.

Head (South Asia), Economics Research, Standard Chartered Bank. Views are personal

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