Mumbai: India's latest gross domestic product (GDP) numbers indicate 13.5% growth during the April to June 2022 quarter. How does this compare with GDP growth in previous years, particularly before and after the Covid-19 pandemic disruption?

To help us understand the new GDP numbers in this context, we spoke with Dharmakirti Joshi, chief economist at rating agency CRISIL.

Edited excerpts:

First, how should we look at India's latest GDP numbers, standalone? Second, how do we look at India's overall economic output, in terms of where we are today versus where we were, or where we could be?

GDP growth still being held back.

I think the 13.5% GDP growth that we saw in the first quarter [of fiscal year 2022-23] has to be seen with respect to the fact that this was the first quarter in the last three fiscal years which was not functionally disrupted by the Covid-19 [pandemic], so contact-based services rebounded very sharply. Thus, there was a base effect, because in the April to June quarter last year, we had the [second wave driven by the] Delta variant, and before that was the beginning of the Covid-19 [pandemic]. So this [growth] happened [compared to] a somewhat weaker base. On top of that base effect, we got the rebound in contact-based services, which were [at] quite low levels and are still trailing the pre-pandemic levels. That's one aspect.

The second way to look at the GDP is to define GDP from the demand side as consumption--private consumption, plus government consumption, plus exports minus imports, plus investment. So what we're seeing in the data right now is a pick up in the private consumption part, which has rebounded quite strongly. The second part of the GDP which is positive is investment, where investment as a percentage of GDP has continued to rise.

But what is holding the GDP back is 'exports minus imports'. Because global growth is slowing, exports are slowing. And since imports are very sticky, imports continue to rise. So clearly that part is subtracting quite a lot from GDP. This is visible in the first quarter data and will be visible in the next quarters that lie ahead. That's one way of looking, numerically, at what's driving and what's not driving [GDP growth].

If you look at GDP from the supply side, as I explained earlier, it's the contact-based services rebound which is supporting the GDP [growth] most. I think agriculture has been reasonably good and there is a muted recovery in industry.

Is private consumption at its highest ever? Is there any benchmark?

Rebounding private consumption behind GDP growth.

Private consumption as a percentage of GDP is around 59.9%. This is the first quarter where we have seen a rebound in private consumption. Historically, if I take you back to the 1950s, private consumption was 70-80% of the GDP and it has gradually been coming down and investments have become stronger than private consumption. So in the two years of Covid-19, private consumption was weakening and was the slowest to recover, even in 2021-22.

So I think this is the first time in the last three years that private consumption has rebounded decisively, at an aggregate level, and that's partly because a lot of contact-based services, which were not being consumed earlier, are being consumed now. So this is a kind of pent-up demand being satisfied.

Where does the gross value added, or the total economic output, stand if you were to look at it from a five-year perspective?

GDP growth reflecting Covid-19 permanent loss.

Another way to look at GDP is where you would have been and where you are. Let's assume there was no Covid-19. Then I think India's GDP would have grown at the trend level, which was around 6.5% per year. Thus India's GDP today would have been about 10% higher than where it is. So we've actually permanently lost about 10% of GDP and we cannot bridge that figure until we grow extremely fast, which is about 12-13% per annum, for the next three to four years. So that permanent loss stays with us, at least in the medium run.

In 2019-20, before Covid-19, we were looking at GDP growth of 3.7%. Was that figure an aberration? How does it influence subsequent GDP figures?

Covid-19 extended GDP growth down cycle.

What happens is that the economy moves in cycles. It's never a straight line. If you look at the last 50 years, there are periods when we grow above the trend, and periods when we grow below the trend. So before Covid-19, we were growing below the trend, and a lift from 2019-20 levels would have taken place. Now, that got disrupted by Covid-19, so that brought the GDP down much more. So in a way, [Covid-19] not only extended the down cycle, but it also made it very prominent, so prominent that the economy contracted by 6.6%.

If we were to look at the overall economic performance, there are some factors that hold growth back and other factors that accelerate it. What are those factors today?

Strong external headwinds against GDP growth.

I think what is accelerating growth, which I already spoke about, was the base effect. Last year, all quarters were disrupted, as well as the year before that. So this is the first time we got a statistical lift to growth. That's one part. What is working for the economy right now is investment, because these have been low for a very long time. Reserve Bank of India data also show that capacity utilisation is rising in the economy. So that prepares the ground for the revival of private investment.

But I think there is another force, which is economic uncertainty, which holds it back. [There is a] very muted increase in private investment, so the central government is doing the heavy lifting right now. State government investments are still 6% below what they were last year during the same quarter. So overall, investment is helping.

What's going to cloud the recovery is the external sector now. That is going to be a big challenge because our exports are very sensitive to global demand, and not so much to exchange rates. So a depreciating rupee doesn't help much. Exports will slow down, which was visible in the August data that came out on Saturday. Imports are sticky. We have no option but to import most stuff. I think that is causing the trade deficit to go up. As a consequence, it is becoming a challenge for the GDP. So demand, now on, will have to be domestically driven. The external support for demand is dwindling.

The external situation in a year's time looks very tricky. We're heading into winter, energy prices are rising, most Western economies--particularly in Europe--are already gearing up for some tough times, and interest rates are rising. All of this is going to affect capital flows and demand. How is this going to impact us, and to what extent?

GDP growth to be more constrained next year.

I wouldn't be concerned so much about this year's GDP growth, as we may still get above 7%. But next year, I think two things are going to hit us. One is the monetary policy [actions] or interest rate hikes across the world, which you just mentioned. These have a lagging impact on the economy, which could take three or four quarters, depending on how fast the transmission is in a particular economy. All that is going to show up in 2023. Even interest rate hikes in India have not impacted growth as yet. Financial conditions have tightened a bit, but not so tight as to restrict growth. But I think by next year, we could see the lagged impact of rate hikes play out. So the GDP [growth] will be more constrained next year, than this year.

What will be the impact of inflation and price rises?

Inflation is affecting both individuals and companies.

I think we all understand inflation is a tax, and it's more of a tax on the poor. We've seen that the urban economy has faced somewhat lower inflation than the rural economy this year. [Inflation] destroys the purchasing power of particularly lower income brackets, because they spend more on food and energy. [Inflation] holds their spending power back and this is reflected in the FMCG [fast moving consumer goods] data that came out for the first quarter, where the volume growth was not so good but the value growth was good, because it was just inflation that was driving companies' top lines.

For an individual, [inflation] is not good news. For companies also, it's not so good news, because when the demand in the system is not so strong, companies push the input cost increases to end consumers to protect their margins. And I think they have. So this last quarter that has just gone by, what we found was that company margins have come down despite [this] pass through, which means they have not been fully able to pass through [the input cost increase].

So [inflation] is a stress on companies as well as on individuals. And that is the reason why, despite improving consumer confidence, I think the RBI still puts [the economy] in the pessimistic zone. It's not completely recovered.

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