Optimism and reality

The National Statistics Office’s First Advance Estimates of GDP for each fiscal year are based on a rough extrapolation of headline indicators for the first six to eight months and are mainly intended as inputs to the Budget-making exercise. The latest release estimating that real GDP and nominal GDP growth rates will be at 9.2 per cent and 17.6 per cent, respectively, in FY22 must therefore be read with caveats. Building on the low base effect caused by the pandemic, the NSO expects manufacturing (up 12.5 per cent against negative 7.2 per cent), construction (up 10.7 per cent against negative 8.6 per cent) and trade, hotels communication and transport (expand 11.9 per cent against the 18.9 per cent contraction last year) to take GVA growth to 8.6 per cent. Should this come good, both agriculture and industrial activity would exceed pre-pandemic levels (FY20 numbers) this fiscal while services activity would be just below it. The Advance Estimates are even more optimistic on nominal GDP, expecting it to grow 17.6 per cent in FY22 against a 3 per cent contraction last year. As this nominal GDP estimate makes up the denominator for the Union Budget’s deficit calculations, the generous expansion assumed will allow the Centre additional elbow-room on expenditure.

As the advent of the highly transmissible Omicron or the rapidly spreading third wave in India weren’t in the reckoning until very recently, there are some aspects to the above estimates that could face challenges. One, in arriving at a GDP growth forecast of 9.2 per cent for FY22, NSO assumes that economic activity in the second half would accelerate over the first half, with 58 per cent of agricultural GVA, 53 per cent of industry GVA and 52 per cent of services GVA for the full year expected to be achieved in the second half. While agriculture may yet improve its performance, disruptions from the third wave look set to impede both industry and services performance. The big rebound factored in trade, hospitality, communications and other services could be particularly tough to achieve should lock-downs and mobility restrictions make a return. Two, the expenditure-wise breakdown suggest that the NSO is pinning its hopes on a significant pick-up in private investments. While private consumption is expected to grow a muted 6.8 per cent and government expenditure 7.6 per cent in FY22, gross fixed capital formation is expected to expand 15 per cent. While government capex may well lend a helping hand to this, India Inc is just about beginning to talk of expansion plans. We need to watch whether Omicron-related disruption forces a rethink.

It is also interesting that, in expecting nominal GDP growth of 17.6 per cent against a real GDP growth of 9.2 per cent, the NSO is factoring in inflation at 8.4 per cent for FY22. If these are indeed the general inflation rates (wholesale and retail) prevailing in the economy, the MPC faces an even tougher trade-off between stimulating growth and reining in inflation than we think.

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