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india gdp: How latest GDP numbers reveal Indian economy’s ongoing structural transformation

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The ongoing World Cup has revealed that a change is brewing in the global football order with a convergence between the traditional superpowers of Latin America and Europe and new frontiers of African and, to a lesser extent, Asian countries. The latest GDP numbers similarly reveal an ongoing structural transformation of the Indian economy. Such changes are now challenging conventional thinking.

For starters, post-release of the GDP data, questions have been raised regarding the viability of the agricultural growth numbers at 4.6%, the highest since Q3 FY2020. True, the agriculture ministry has pegged the kharif foodgrain production at 149.9 million tonnes against 154.9 million tonnes in FY2022. However, FY2022 estimates are 11.9 million tonnes more than the pre-pandemic level, an 8% increase, against an average 2.5% increase over the decade. So, any decline could signal reverting to a mean.

However, a decline in foodgrain production is unlikely. There is a lingering doubt that unseasonal rains may have played spoilsport in impacting foodgrain output. But the latest sowing data shows a 7% increase in area sown till end-November. The unseasonal rains didn’t seem to have a material impact on areas sown that have expanded at a healthy rate. Informal interactions with farmers across states suggest that farmers have now become smarter and have adjusted to the new realities of rainfall. They are also using information on weather judiciously by resorting to planting crops of longer duration.

For example, in states like Madhya Pradesh, farmers have changed the soyabean crop cycle from 70 days to 85 to mitigate the impact of unseasonal rains. Similarly, farmers are now resorting to allied activities like floriculture that has huge export potential. The share of allied activities in agriculture has jumped from 38% to 44% for the 8-year period ended FY2022, with activities like fishing, aquaculture and livestock gaining prominence.

The storage and transport facilities and drip irrigation system are now much better. No wonder the average vegetable arrival in mandis is now 44% higher than the pre-pandemic level, thus perhaps mitigating the impact of unseasonal rains to a significant extent. The sowing of wheat and paddy has also reportedly picked up briskly. This will clearly act as an offsetting factor to cereal production. Thus, it seems that the pick-up in agri and allied growth is no flash in the pan.

Also, the curious case in the data is the decline in government consumption expenditure during the quarter, even though there was a jump in public administration and other services. This is a new trend in GDP data that has been perplexing since the pandemic and has important implications.

Public administration and defence includes other services such as education (private tuition, coaching centres), health (nursing homes, personal care services), and government social and personal services that governments as well as local bodies are now spending more on to rev up social capital.
In contrast, government gross value added (GVA) is the sum of intermediate consumption, compensation of employees, etc. Post-pandemic, there seems to be a downward adjustment in intermediate consumption by government that includes reduction in contingent expenditure such as office supplies, rent, rates and taxes, fuel and light, etc. So, there has been a post-pandemic shift away from less productive government expenditures to capital and social expenditures.

Going beyond the GDP print, the news on the external sector now seems much less discomforting. There have been concerns about the sustainability of financing India’s current account deficit (CAD). CAD in the current fiscal was expected to breach 3.5% of GDP. However, Q1 FY2023 balance of payment (BoP) numbers revealed a strong countercyclical buffer in the form of service exports, and remittances will pull down overall CAD to 3% in the current fiscal. As per the World Bank data, remittances to India will be strong in 2022. For every rupee of depreciation, software exports increase by $250 million.

Also, contrary to popular perception of the informal sector being hard hit during the pandemic, the MSME sector has bounced back strongly and is driving credit growth. It has been possibly the best demonstration of resilience of the Indian economy and its stakeholders.

Finally, a word on the rupee and India’s foreign exchange reserves. India has recouped nearly $25 billion of forex reserves since end-October, as the US dollar has weakened and revaluation is gaining prominence.

Clearly, the GDP headline number, just like the proverbial average, hides more than it reveals. On the field, India is changing.

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