Shadows of global slowdown: What the latest GDP numbers tell us about the nature of India's economy

By: Anshul Vipat

The manufacturing sector that contributes 17 percent to the GDP has been experiencing slowdown thus impacting GDP figures.

Its official now. India is experiencing an economic slowdown in line with IMF and RBI predictions. As per the latest data released by the Ministry of Statistics and Programme Implementation, India's economy grew by 6.3 per cent in the second quarter of the current fiscal. This is far slower than the 13.5 percent growth reported in the previous three months as geopolitical distortions impacted Asia’s third-largest economy.

The gross domestic product (GDP) had expanded by 8.4 percent in the July-September quarter of 2021-22.

The figures are in line with the domestic and global projections indicating an economic slump. Rating agency IRCA had predicted that the GDP was likely to grow at 6.5 percent, while State Bank of India had projected the growth rate at 5.8 percent. Earlier this month, in an article published in the Reserve Bank of India (RBI) bulletin, the GDP growth was pegged at 6.1-6.3 percent in the second quarter of this fiscal year.

However, despite the slowdown, India continues to remain as the fastest growing economies in the world. China, for instance registered an economic growth rate of only 3.9 percent in July-September, 2022.

Why is India experiencing economic slowdown?

Erratic monsoons impacting the Kharif output, poor exports, weak consumer sentiments and tepid revival in industrial activity has ensured an economic slowdown.

First, an unusually erratic monsoon has meant that Kharif food grains output will fall from 115 million tons last year to just about 105 million tons this year. Even with a robust Rabi season, there would be a decline in food grains output, shaving about 0.5 percent from the previously estimated GDP.

The second reason is the persistent weakness in consumer sentiments, particularly among Indians belonging to middle and aspirational classes. Even though, consumer sentiments are increasing in the past few months, it is way lower than pre-pandemic era.

The third factor is external. The Russian invasion of Ukraine and persistent Covid wave in China has triggered massive supply chain disruptions, leading to a near recession in developed economies in Europe and North America. This has hammered Indian exports.

For instance, in October 2022, merchandise exports have crashed to $ 29.78 billion; a decline of 16.7 percent compared to October 2021. This is the first time that merchandise exports have fallen in 19 months. There is barely any category in which exports have not slumped; with textiles and readymade garments taking a big hit. Textile exports crashed by more than 41 percent.

Engineering goods, a mainstay of India’s exports in recent years, dropped over 21 percent to $7.4 billion (when compared to October 2021 figures), with the Ministry stating that the $2 billion drop ‘includes steel and its products’, signalling that the export tax on iron and steel is hurting these exports.

Slump in economic activity

The manufacturing sector that contributes 17 percent to the GDP has been experiencing slowdown thus impacting GDP figures. In August, India's Industrial output slipped to an 18-month low contracting by 0.8 percent. The industrial output so far in the fiscal year 2022-23 (April-August) has risen 7.7 per cent, compared to a spike of 29.0 per cent in the corresponding period a year ago, the data showed.

As the above chart shows, manufacturing sector grew only by 5.6 percent in Q2 FY22. It further shrank to 0.3 percent in the next quarter. The decline continued in the last quarter of the financial year as well contracting by 0.2 percent. Increasing inflationary pressures and supply chain bottlenecks contributed to this major decline. Thankfully, the sector showed resilience in March-June 2022 with a 4.8 percent growth. But this was nowhere near to 50 percent growth shown in the same quarter last year.

FY23 GDP downgrade continues

In the first quarter of FY23 as lockdowns ended, GDP expanded by 13.5 percent. However, this was also lower than most estimates – sending many agencies and the RBI itself to revise their growth projections of the year to 7 percent this September, from 7.2 percent earlier.

In its annual World Economic Outlook report, the IMF put India's GDP growth at 6.8 per cent in 2022 - a 0.6 percentage point downgrade since the July forecast of 7.4 percent. Even the July forecast was lower than 8.2 per cent projected in January this year. And IMF isn't the only one that has slashed its projection. Last month, the Asian Development Bank lowered the 2022-23 GDP growth forecast to 7 percent down from a forecast of 7.2 early this year. Before this, Fitch had also slashed India's growth forecast for 2022-23 to 7 per cent from previous estimates of 7.8 per cent.

However, not everything is gloomy. Experts believe that India's growth prospects remain relatively optimistic when compared to the world. As mentioned above, India remained the fastest-growing major economy despite the slowdown.

Foreign reserves are at a historic high even after a massive decline (India’s foreign exchange reserves remain elevated at $533 billion—a respectable 8.6 months of goods import cover—even after a fall of about $100 billion since the start of the year). Imports in the country has increased suggesting growing domestic consumption. This is good news for the consumer market. Besides, as per latest figures, both the retail inflation and food inflation has declined significantly.