Indian economy grew at the weakest pace in January-March in a year due to weak demand, according to a Reuters poll of economists. In the previous quarter (October-December), the country’s gross domestic product (GDP) unexpectedly grew by 8.4% compared to a year earlier, primarily due to a sharp drop in subsidies, which artificially boosted net indirect taxes.
However, as measured by gross value added (GVA), economic activity showed a more modest 6.5% expansion. Economists in the poll noted that this situation was unlikely to have been repeated in the last quarter, suggesting that the substantial growth seen in the previous quarter was not expected to be replicated.
Indian Economy at the Weakest Pace in January-March
According to a survey of 54 economists by Reuters, growth in India’s economy likely slowed to around 6.7% annually in the January-March quarter. This rate is more in line with the country’s long-term GDP growth rate. The growth in Gross Value Added (GVA) was expected to be even slower at 6.2%.
Most economists noted moderation in both the manufacturing and services sectors as the reason for the slowdown. Additionally, they mentioned that the contribution from agriculture was not very significant.
Forecasts for GDP growth ranged from 5.6% to 8.0%. The official data is expected to be released at 1200 GMT on May 31, just before the announcement of general election results on June 4. Prime Minister Narendra Modi is anticipated to secure a rare third term in power.
Kunal Kundu on India’s Economic Outlook
Kunal Kundu, an economist at Societe Generale, expects little improvement in India’s economy, saying, “We expect some sanity to return.” He believes there won’t be any major improvements in different sectors. More than two-thirds of economists surveyed don’t think GDP growth will exceed their forecasts significantly. However, some are more optimistic.
Kundu points out that core inflation is dropping, indicating weak domestic demand. He also expects weaker growth in private consumption, which makes up 60% of GDP, in the upcoming quarters.
Economic growth, which averaged 7.7% last fiscal year, is forecasted to slow to 6.8% this fiscal year and 6.6% in the next. This suggests that consistent 8% growth, which is needed to generate enough jobs for the growing workforce, is still far off for India. Some economists doubt that such high growth can be consistently achieved.
Challenges and Reforms for India’s Economic Growth
According to Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, India’s economy has a “reasonable” potential growth rate of 5-6%. However, realizing this potential requires crucial reforms. Unfortunately, the Modi 2.0 government seems to have taken steps backward in this area. Reversals in agriculture reforms, delays in implementing new labor codes, and a departure from regional trade agreements are notable setbacks. Moreover, there’s a noticeable disparity between GDP forecasts made by financial economists and those provided by the government, raising concerns about the accuracy of India’s growth measurement methods.
NSO’s GDP Projection and Concerns about Informal Sector Estimation
The National Statistical Office (NSO) anticipates a 5.9% GDP growth rate in the January-March quarter. However, Dhiraj Nim, an economist at ANZ, raises concerns about a potential overestimation of the informal sector’s GDP. He suggests that the actual situation on the ground might not be as positive as indicated by the headline numbers due to this overestimation. Since the informal sector contributes nearly half of India’s GDP and employs about 90% of the country’s workforce, accurate estimation is crucial for assessing the economy’s true health.
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