Aunindyo Chakravarty
Senior Economic Analyst
THE latest GDP figures (gross domestic product) are out. Darbari stock market economists and their cheerleaders cheer on TV. They say, “Not only have we recovered from the Covid setback, but we are well on our way to a mega-growth phase.” Even Sarkari data experts have been accused of excessive pessimism. Not only have they raised their GDP estimates for 2022-23, but even the figures for 2021-22 have been revised upwards. But are we really over the hill?
In order to be able to judge this, we have to divide our economy into the period before and after the crisis. We will take the 2020-21 Covid year out of the equation as nobody has been able to control the recession this year. It was an external, accidental disruption to the normal growth path of our economy. So I will compare the first six pre-Covid “modi” years – 2013-14 to 2019-20 – with the last two post-Covid years – 2021-22 and 2022-23, when lockdowns ended. The former will allow us a medium-term growth path. The second gives us the average growth rate of the recovery.
Our GDP grew at an average annual rate of 6.8 percent in the pre-Covid period of our analysis and at an average of 8.1 percent over the past two years. If we assume that the economy would have continued to grow on the old glide path had Covid not disrupted it, our real GDP would have been around Rs 177 million in 2022-2023. Instead, it has surpassed just under 160 million rupees. That’s almost 10 percent less than it would have been without the Covid recession.
If we assume that our GDP will continue to grow at the current recovery rate of 8.1 percent for the next few years, it will take another seven years before we reach the old glide path. If Covid had never occurred, the old growth rate of 6.8 per cent would have brought our GDP to about 300 lakh crore rupees in 2030-31. Then our post-Covid GDP will also reach that number if it continues to grow at 8.1 percent.
At this time we have no reason to believe that the 8.1 percent rate can be maintained. This is because the GDP growth rate has fallen from 9.1 percent in 2021-22 to 7.2 percent in 2022-23. There has been no disruption from Covid-19 this year, although we are still seeing signs that pent-up consumption and investment, which have been stalled due to Covid, are being unwound. This suggests that our GDP growth rate is likely to settle at around 7 percent for the next few years. That’s more than the RBI’s 6.5 percent forecast for 2023-24. If we assume 7 percent as the more likely growth rate for the next decade, it will take us eight years to reach the old pre-coronavirus GDP glide path. The two charts will not meet until 2031–32.
But that doesn’t give us the full picture. To find out, we need to take a closer look at national income and production data and break them down into different sectors. Agriculture, for example, has not been affected by Covid. If anything, agricultural production rose even in 2020-21, the year of lockdowns and global supply chain disruptions. Gross value added in the agricultural sector is already higher than without Covid. This is mainly because there have never been lockdowns in rural areas and we have been blessed with three years of solid monsoons.
Production, on the other hand, has completely collapsed. Between 2013-14 and 2019-20, it grew at 6.4 percent per year. Had this growth rate continued, the gross value added (GVA) of the factory sector would have reached Rs. 27.2 million in 2022-23. According to the latest estimates, the gross value added in the manufacturing sector is Rs. 26.2 million. The average growth rate has fallen to 6.1 percent. This means that if the current rate of recovery continues, we will continue to move away from where our factory sector should have been. By 2030-31, the gap between actual and potential GVA in manufacturing will widen to almost Rs 2.5 crore.
When it comes to services as a whole, it will take another 13 years to get back to our old glide path if the current rate of recovery growth continues. This is also due to the large category “retail, hotel industry, transport, communication and broadcasting services”. This sector accounts for most of the jobs in the service sector and generates almost a fifth of our GDP. If it continues to grow as fast as it has in the last two “post-Covid” years, this sector will be back on the old glide path by 2026-2027.
However, the most important sectors of the economy are in great difficulties. There are two categories: financial services, real estate and professional services; and public administration, defense and other services. Together they account for about a third of our GDP and less than 10 percent of all jobs. But the majority of white-collar jobs are based here. This includes all professions in banking and finance, real estate service providers, lawyers, doctors, IT specialists, teachers and civil servants.
These two sectors have slowed down significantly compared to the old pre-Covid days. Together they grew by 7.6 percent per year between 2013 and 2014 and between 2019 and 2020. They shrank 1.5 percent in the Covid year, rose 6.5 percent in 2021-22 and 7.2 percent in 2022-23. The average recovery growth rate is just 6.8 percent. At this rate, these two segments may never again reach the pre-Covid glideslope. This will have a significant impact on the Indian middle class as it becomes increasingly difficult for them to achieve their goals. This, in turn, will negatively impact sales of the goods that the middle class buys — small cars, Indian-made consumer goods, affordable homes — and their savings as well. The top one percent, earning income from business, commerce and wealth, will continue to do well and become increasingly dependent on national income.
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