NSO’s provisional estimates for 2021-22 including GDP numbers for the Q4 signal a full recovery from the Covid shock. Real GDP and GVA growth of 8.7 per cent and 8.1 per cent respectively indicate a robust growth momentum although there was still a strong base effect in Q1 and Q2 of 2021-22.
As the base effects weakened in Q3 and Q4, the real GDP growth declined to 5.4 per cent and 4.1 per cent respectively. This reflects that normal growth without any base effect is still about 5.0 per cent. The ongoing inflationary external pressures mainly due to global crude prices require careful policy calibration to retain growth in 2022-23 to close to 7.0 per cent.
Quarterly data reveal that the manufacturing sector showed a contraction of (-)0.2 per cent in Q4 of 2021-22. The recovery in the construction sector is still weak with a growth of 2.0 per cent in this quarter, reflecting unfavourable base effects.
For 2021-22, growth in these two sectors was 9.9 per cent and 11.5 per cent respectively. The annual data signal that the weakest sector was financial, real estate and professional services with a growth of 4.2 per cent in 2021-22.
On the demand side, the weakest performance was that of government final consumption expenditure (GFCE) with a low growth of 2.6 per cent in 2021-22. The contribution of net exports to real GDP growth was negative at (-)2.9 per cent points. Private final consumption expenditure (PFCE) grew by 7.9 per cent in 2021-22 over 2020-21 but its 2021-22 magnitude was only ₹1.2 lakh crore higher than the pre-Covid level in 2019-20.
One bright spot is the recovery in investment demand reflected by strong growth of 15.8 per cent in gross fixed capital formation (GFCF).
Inflation challenges
Current inflation trends indicate the likelihood of significant adverse growth effects. In 2021-22 both CPI and WPI based inflation rates were at 5.5 per cent and 13.0 per cent respectively.
A high WPI inflation would keep pushing up CPI inflation in 2022-23. The inflationary pressures are emanating from the high prices of global crude and primary commodities and other supply-side challenges. In the short run, not much can be done to ameliorate these supply-side pressures. Recognising this, the RBI increased the repo rate by 40 basis points to 4.4 per cent in an out-of-schedule meeting of the Monetary Policy Committee (MPC) held on May 4. This happened after a gap of 24 months.
There is a strong likelihood that the RBI may further increase the repo rate in its upcoming meeting in June and subsequent meetings to keep CPI inflation within the acceptable ceiling of 6.0 per cent. As the cost of investment increases, investors may slow down their investment demand. Under such circumstances, fiscal policy may have to play a strong growth-supporting role.
Fiscal policy and growth
One positive spin-off of the high inflationary trends is that the Implicit Price Deflator (IPD)-based inflation turned out to be 10.0 per cent in 2021-22, its highest level since 2010-11. Correspondingly, nominal GDP growth was at 19.5 per cent. This, combined with a buoyancy of 1.7, yielded growth of 33.8 per cent in the Centre’s gross tax revenues (GTR) in 2021-22.
With an expected nominal growth of 15 per cent and a buoyancy of 1.2, the additional GTR in 2022-23 may be close to ₹2.0 lakh crore. This will mitigate, to some extent, the revenue reducing the impact of the government’s recent initiatives of reducing excise duty on petroleum products and other similar initiatives with a view to giving some relief to the consumers.
The Centre’s fiscal position may be further helped by improving its non-tax revenues over and above the budgeted estimates. In 2021-22, non-tax revenues did rather well as they turned out to be ₹34,253 crore higher than the revised estimates. This enabled a marginal reduction in the Centre’s fiscal deficit relative to GDP at 6.7 per cent compared to the revised estimate of 6.9 per cent in 2021-22.
Going forward, in 2022-23, the IPD-based inflation may remain high given the current inflationary trends. With the expectation of nominal GDP growth in 2022-23 being significantly above the real GDP growth, the Centre may garner tangibly higher tax revenues compared to the Budget estimates.
The Centre may also have to pursue actively its disinvestment targets to avoid last year’s shortcomings. With respect to non-tax revenues, given the already announced National Monetization Pipeline, the government may be able to garner some additional resources in excess of the Budget estimates. These trends and initiatives will result in tangible additional fiscal capacity.
This additional fiscal capacity should be used to bolster government investment expenditure while retaining the fiscal deficit target of 6.4 per cent of GDP in 2022-23. If necessary, some reduction in government revenue expenditure may be undertaken.
Thus, with suitable management of fiscal policy, India may be able to reach a real GDP growth of 7 per cent or above in 2022-23.
The writer is Chief Policy Advisor, EY India and formerly Director, Madras School of Economics. Views expressed are personal