How is India doing? Let’s look at some macroeconomic indicators

Robust annual growth of 7.2% in 2022-23 masks the sharp growth slowdown from 9.5% in the first half of the year to only 5.3% in the second half (see table). On the demand side, the slowdown is most evident in private consumption and investment (fixed capital formation). On the supply side, the slowdown is mainly visible in services, where growth halved from a high 12.6% in the first half of 2022-23 to only 6.5% during the second half. High frequency indicators suggest that this slowdown has persisted during the first quarter of 2023-24, especially in services. Our growth forecast for the full year is around 6%. Given the grim global background, achieving this will be quite remarkable.

But is this output growth effectively translating into employment growth? A Niti Aayog paper by Chand and Singh estimated a workforce of 512 million persons in 2019-20, growing by about 25 million persons annually. This implies a workforce of around 590 million persons in 2023. Is growth generating enough new jobs to absorb this work force? The Chand-Singh paper implies that it is, because their estimated unemployment rate declined from 6% in 2019 to 4.8% in 2020. Using a somewhat different definition of unemployment, the private-sector Centre for Monitoring the Indian Economy (CMIE) estimates that the un- employment rate in India is about 7.5% in 2023.

Of course, these unemployment estimates cannot reflect India’s exceptionally low labour force participation rate (LFPR), especially among women, which is arguably a more serious challenge than open unemployment. As the Chand-Singh paper points out, about 60% of persons in the working age group are not in India’s labour force at all. If the LFPR were significantly higher, unemployment would also be much higher. These unemployment estimates also cannot capture the huge backlog of underemployed workers or those in disguised unemployment.

In other words, while the growth rate of 6% is an achievement under present global economic conditions, it is nowhere near the rates of growth we require to effectively deal with the problems of unemployment and underemployment.

Inflation is also a matter of serious concern now. Headline inflation remained above the upper limit of the Reserve Bank of India’s (RBI) inflation tolerance band of 6% virtually throughout 2022-23. There was a broad-based decline in inflation to less than 6% in the first quarter of 2023-24, finally responding to RBI’s repo rate increase by 250 basis points between May 2022 and February 2023, plus other monetary policy tightening measures. However, it has again spiked up to 7.4% in July 2023, mainly due to an increase in food prices.

This is a consequence of Russia’s withdrawal from the Black Sea wheat export arrangement in the global market, combined with domestic food supply disruption due to erratic rainfall. With general elections just nine months away, inflation has become a serious political issue. The NIPFP forecasts an inflation rate of 7.9% for the whole year 2023-24.

In the external sector, the current account deficit (CAD) had contracted to less than 0.2% of GDP in the fourth quarter of 2022-23, mainly due to a sharp contraction in imports, reflecting the growth slowdown. But the CAD began widening again in the first quarter of 2023-24. To end this chronic CAD stress, we need to rethink the policy of increasing recourse to tariff protection and quantitative trade restrictions and the reluctance to participate in regional trade agreements in which global supply chains are increasingly embedded.

As the CAD contracted, capital inflows also contracted from about $49 billion in the first half of 2022-23 to only $19 billion during the second half. Foreign direct investment (FDI) inflows recovered during the first quarter of this financial year and foreign portfolio investment (FPI) peaked. However, continuing policy rate increases in the US and other advanced countries and the recent Fitch downgrade of US sovereign debt have triggered an FPI flight to safety from most emerging markets, including India.

This has complicated the conduct of monetary policy. With the recent spike in headline inflation, RBI may wish to resume the repo rate increases that it paused in February. However, apart from stalling a bullish trend in the stock market, FPI outflows have also led to a sharp increase in bond yields. Further raising the repo rate under these conditions could be problematic. It could also have an adverse impact on the flow of bank credit, which has been quite robust so far.

If monetary policy, nevertheless, focuses on containing inflation, fiscal policy can focus on addressing the growth slowdown. The central government’s strong and sustained focus on capital expenditure (capex) does this. However, maintaining this focus has become difficult now, due to the sharp decline in central government tax revenues during the first quarter of 2023-24.

The budgeted 0.5% of GDP reduction in the fiscal deficit may now be difficult to achieve. It implies that the 0.7 percentage point annual reduction in the fiscal deficit required during the next two years to meet the 4.5% target for 2025-26 will have to be raised even further. Achieving that may not be possible without a strong tax revenue mobilization effort if the capex thrust is to be sustained.

Sudipto Mundle is chairman, Centre for Development Studies.