– By Chinmay Joshi
The recently released World Economic Outlook (WEO) April 2023 by the International Monetary Fund (IMF), painted a gloomy picture for the world economy in the ensuing period terming it as a ‘rocky recovery’ amidst the looming uncertainty. The global economic growth outlook is marred by manifold threats emanating from Russia-Ukraine war, lingering negative impacts of Covid-19 pandemic, persistence of elevated inflation, tightening of monetary policies and negative impacts of recent banking sector problems in the United States and Europe engulfing the financial sectors among others. According to the WEO April 2023, IMF, the world output is expected to decline in 2023 to 2.8 per cent from 3.4 per cent in 2022 before exhibiting a sign of recovery in 2024. India, which is a fifth largest economy in the world has also experienced a deceleration in economic growth in its yearly growth rate.
As per the Provisional Estimates (PE) released on May 31, 2023 by the National Statistical Office (NSO), MOSPI of Government of India (GoI), the real GDP growth rate is expected to decline from 9.1 per cent in 2021-22 to 7.2 per cent in 2022-23. The real growth rate is projected to decline further in the next financial year to 6.5% as per the Economic Survey 2022-23. Despite beating the 7.0 per cent real growth rate target as projected by the official estimates of GoI and RBI in FY 2022-23, on a quarterly basis, the growth trend exhibited a continuous decline in the initial quarters from 13.1 per cent in Q1, 6.2 per cent in Q2 and 4.5 per cent in Q3 before showing a sign of an uptick of 6.1 per cent in Q4 of FY 2022-23.
Contraction in demand in the economy is evident from the steep deceleration observed in the growth rate of the private final consumption expenditure (PFCE). This has been accompanied by the subdued government final consumption expenditure (GFCE) and gross fixed capital formation (GFCF) implying both consumption and investment are on the declining trajectory. On the other hand, the supply side growth also exhibited a similar trend where services and manufacturing sectors which are essential for employment generation, registered a lacklustre growth. Besides, the Indian growth story is negatively affected by the tepid performance on the employment generation front. As per the Centre for Monitoring Indian Economy (CMIE) Pvt. Ltd., the unemployment rate in India went up to 8.11 per cent in April 2023 where urban and rural unemployment rate recorded at 9.81 per cent and 7.34 per cent respectively.
In this difficult economic situation, it is necessary for the government to achieve sustainable economic growth by reviving the falling growth rate of consumption and investment. Expansionary fiscal policy measures announced in the Union Budget 2023-24 such as changes in the tax structure, boosting capital expenditure with focus on infrastructure expansion, supporting green growth and other measures will be helpful in this regard. In addition to that, increasing exports of goods and services has the potential to generate growth and employment. Export promotion policies as well increasing competitiveness of our products are required to be encouraged in order to increase our exports. Services exports should be given adequate attention as the services sector is one of the largest employment generating sectors in India along with agriculture. However, it should also be noted that the growth in exports will largely be dependent on the elasticity of demand for our exports abroad.
Furthermore, the use of Artificial Intelligence and Machine Learning (AI&ML) based technology will certainly provide a required support to increase productivity and thereby increase the economic growth for India. Role of technology in increasing productivity and output is crucial. Technological development is one of the important aspects in increasing the productive capacity factor of productions. Sustained increase in adoption of AI&ML technologies in manufacturing firms, labour intensive industries will ensure the completion of risky, routine and repetitive jobs efficiently and effectively. Current inventions in AI&ML technologies and its calibrated application will be beneficial in many sectors such as education, healthcare, e-commerce, manufacturing, banking, IT and IT enabled services among others. In this context, it is important to note that as per the National Association of Software and Services Companies (NASSCOM) report, implementation of AI and data utilization of strategies in key vital sectors such as Consumer Goods and Retail (CGR), Banking, Financial Services and Insurance (BFSI), Energy and Industrial and Healthcare sector has the potential to contribute around $500 billion to India’s Gross Domestic Product (GDP) by 2025.
Against this backdrop, however, it should also be worthwhile to note that the AI&ML based technology still has many downside lacunas. It has not yet been able to deliver flawless results and is prone to commit errors in output generation. Besides, problems with data security, trust related issues, inability to achieve human level cognitive abilities need to be paid a very careful attention. Apart from that, such a technological innovation has the potential to impact the employment generation negatively. In this context, it has been observed that many technology firms and start-ups in advanced as well as emerging and developing economies have started restructuring their workforce due to emergence of new and innovative technologies, lack of consumer demand and uncertain global macroeconomic conditions. Companies are now opting to use more AI&ML based technologies instead of human beings so that costs are minimised. Thus, declining job opportunities along with widespread layoffs will eventually lead to reduction in purchasing power of the people causing reduction in aggregate demand in the economy which has potential to impact the economic growth adversely.
The Solow-Swan model or exogenous growth model developed by the American Economist Robert Solow and the Australian Economist Trevor Swan in the year 1956 talked about achieving the long-term economic growth by capital accumulation, labour growth and increase in productivity with the help of technological advancement. Amidst this dwindling economic growth scenario coupled with rising unemployment levels, it is imperative for India to increase the total factor productivity. The question arises here is that – will the current technological development steered by the rapid innovations in AI&ML based technologies lead to increase ‘The Solow Residual’ for India?
(Chinmay Joshi is the research associate – finance and economics at Bhavan’s SPJIMR.)
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