India’s 2021-22 GDP Numbers: The Warning Is to Course-Correct, or Sink Deeper

Though the government is quite pleased with the numbers, many analysts have sounded caution.

Provisional GDP numbers for FY2021-22 were released by the National Statistical Office (NSO) on 31 May.

(Photo: Reuters)

Provisional GDP numbers for FY2021-22 were released by the National Statistical Office (NSO) on 31 May. The headline numbers are fairly well-known by now. India’s GDP, at constant prices, was estimated at Rs 147.36 trillion. The 2021-22 GDP growth rate rose at a pretty decent rate of 8.7%. At current prices, the GDP was Rs 236.65 trillion, recording an annual growth of 19.5%. The per capita GDP was Rs 107,670.

Though the government was quite pleased with the numbers, many analysts sounded cautious. What is the real message of GDP numbers 2021-22? We may have to dig deeper to find out.

Reading Between the Numbers

The GDP is made up of two basic constituents – gross value added (GVA) of goods and services produced and the net taxes on products.

The GVA recorded an increase of 8.1% for the year 2021-22, but the quarterly growth for Q3 (October-December 2021) and Q4 (January-March 2022) was only 4.7% and 3.9%, respectively. It was a growth of 18.1% in Q1 (April-June 2021) that was responsible for a respectable-sounding growth rate of 8.1%. Even in Q1 of 2021, the GVA was only Rs 30.53 trillion (Rs 2.35 trillion less than the GVA of Rs 32.88 trillion in pre-pandemic Q1 2019-20).

Effectively, the second half of the year 2021-22 generated a tepid GVA growth of only 4.3%.

This unimpressive GVA growth becomes more dismal if one takes note of the GVA growth in the previous year. In Q3 and Q4 of 2020-21, the GVA growth was uncomfortably low at 2.1% and 5.7%, or 3.9% only for the second half.

India grew at only 3.9% in 2020-21 and 4.3% in 2021-22.

If one goes back one more year to 2019-20, the year before the COVID-19 pandemic, the trend of abysmally low growth in the second half raises more heckles for our growth story. The Indian GVA grew at only 3.4% in Q1 and 3.7% in Q2, averaging barely 3.6% in 2019-20.

This brings the three-year growth trend for the second half to sub-4%.

There is no respite in sight for the current year as well. The Reserve Bank of India (RBI) has estimated Q3 and Q4 2022-23 growth to be only 4.1% and 4%, again yielding GVA growth of only 4% for the second half.

Sub-4% growth in the second half for four years running. Aren’t we in a serious low-growth quagmire?

We have to ignore the first half growth records as these are statistically corrupt. The Q1 growth swung from 5% in 2019-20 to -21.4% in 2020-21 to +18.1% in 2022-23. The first quarter’s fluctuating growth performance impact can be seen in the annual growth rates of -6.6% in 2020-21 and +8.7% in 2021-22.

The real message about our growth dynamics is that we have been in a low-growth groove for four years at a stretch.

Declining Net Taxes on Products Signal Fiscal Logjam

Added to GVA, net taxes on products (taxes on products received by governments minus subsidies on products paid) make up the GDP. For FY2021-22, the GVA was Rs 136.05 trillion and net taxes on products Rs 11.3 trillion, adding up to India’s GDP of Rs. 147.35 trillion.

Higher net product taxes mean higher GDP.

Net taxes on products were Rs 12.96 trillion in FY2019-20. This drastically reduced to Rs 9.73 trillion in FY2020-21 as the government cleared food and other subsidy arrears.

The growth of taxes was quite robust in 2021-22. However, subsidies also grew massively. Consequently, net taxes on products for FY2021-22 is still Rs 1.7 trillion lower than FY2019-20.

Growth in taxes receipts is tapering in FY2022-23. The government has made steep reductions in excise duties/cesses on petroleum products. Many import and export duties have also been cut to douse the inflationary fire.

Subsidies, on the contrary, continue to spiral. Fertiliser subsidies are likely to escalate by another Rs 1.3 trillion over budget. Food and fuel subsidies will also go up. Signals are fairly clear. Net taxes on products will continue to be a drag on GDP 2022-23.

Worsening net product taxes also hurt the government’s ability to contribute to GVA. The government’s final consumption expenditure (GFCE) has, as a consequence, stagnated despite running large fiscal deficits. The GFCE was Rs. 14.82 trillion in FY2019-20. It was only Rs 15.77 trillion in FY2021-22 – an increase of only Rs. 92.8 billion (6.26% over two years).

Fragile Industrial and Services Growth

Manufacturing and construction recorded decent growth in FY2021-22 at 9.9% and 11.5%, respectively. Manufacturing growth mirrors higher exports responding to global demand fuelled by the COVID-19 stimulus.

Manufacturing growth has tapered off in the second half FY2021-22 with Q3 and Q4 growth recorded at only .3% and -.2%. With global demand slowing now, manufacturing growth is likely to decelerate.

Steps taken to control exports of steel and other commodities will impact the growth of the mining and quarrying sector. Constraints on coal may limit growth in utilities – power particularly – despite good demand.

All in all, the industrial sector is staring at much slower growth in 2022-23.

The construction industry is battling very high commodity prices and considerably slowed down in Q3 and Q4 2021-22, growing at only -2.8% and 2% despite higher government capex. The off-take data of cement and steel suggest that soaring wholesale price inflation and rising interest rates have started acting as a drag on the construction industry.

The GVA of economic services – trade, hotels, transport, communications, etc – at Rs. 23.86 trillion in 2021-22 is way lower than the GVA of Rs. 26.90 trillion in 2019-20. After the intense phase of COVID-19 ended by September 2021, there has been a welcome resumption of activity in this segment, with Q3 and Q4 of FY2021-22 recording good growth of 6.3% and 5.3%. This sector is likely to do much better in 2022-23.

Financial services were the only segment, other than agriculture, which had not contracted in FY2021-22. The sector grew, but at a low rate of 4.2% in FY2021-22.

Services had been the growth engine of India before COVID-19. But the sector is still to assume growth leadership.

The Indian Consumer Is the Real Sufferer

Two numbers capture the state of consumer happiness: the private final consumption expenditure (PFCE), which captures consumption, and second, per capita GDP, which captures average incomes.

The PFCE grew to Rs 83.78 trillion in 2021-22, rising by 6% over FPCE of Rs 77.64 trillion in FY2020-21, the year that witnessed a big slide in consumption. Over a PFCE of Rs 82.60 trillion in 2019-20, consumption has grown by merely 1.43%.

If you take into account the increase in population during this period (from 1341 million in 2019-20 to 1,369 million in 2021-22), average per capita consumption has actually come down from Rs 61,594 to Rs 61,197.

Likewise, the per capita GDP has come down from Rs 1,08,247 to Rs 1,07,637. In fact, averages hide the more severe impact on poor people. Consumers have indeed suffered miserably.

What Needs to Be Done?

Though the tidings are portentous, course correction is possible. First, the government must bring order in subsidies expenditure. Providing 5 kg foodgrains per person to 80 crore people over and above food security norms is unnecessary and should be scrapped. The PM Kisan scheme is no longer necessary. Price recovery from fertiliser needs to improve.

Second, the state needs to put the privatisation and monetisation agenda on the fast track to improve manufacturing productivity. The PLI needs to be focused on a few cutting-edge products like semiconductors and renewables. The Indian industry needs to be exposed to competition by removing tariff protection and allowing a liberal import of technology.

Third, there is a need to grow exports by removing restrictions on wheat, sugar, steel and other products. Also, remove the bias in favour of a strong rupee.

Four, the RBI must be relieved of of the responsibility of managing government-borrowing to focus on inflation.

There are many more measures. India can either course-correct or sink deeper. We still have some choice.

(Subhash Chandra Garg is Chief Policy Advisor, SUBHANJALI, author of The $10 Trillion Dream, and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion article and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)