Indian economy far away from recovery

Aunindyo Chakravarty

Senior Economic Analyst

THE latest GDP (gross domestic product) numbers are out. Darbari stock market-type economists and their cheerleaders on TV are rejoicing. They say, “We have not only recovered from the Covid setback, but are also well on the way to a mega growth phase.” Even sarkari data crunchers are being accused of being overly pessimistic. They have not only raised their 2022-23 GDP estimates, but even the numbers for 2021-22 have been revised upwards. But are we really out of the woods?

To assess that, we need to divide our economy into the pre-Covid and post-Covid periods. We will take the Covid year of 2020-21 out of the equation, since the recession that year was not in anybody’s control. It was an external, accidental disruption of 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 the lockdowns ended. The first will give us a medium-term glide path of growth. The second will give us the average recovery growth rate.

Our GDP grew at an average annual rate of 6.8 per cent in the pre-Covid period of our analysis, and it has grown at an average of 8.1 per cent in the past two years. If we assume that the economy would have continued to grow at the old glide path if Covid had not disrupted it, our real GDP would have been about Rs 177 lakh crore in 2022-23. Instead, it has barely crossed Rs 160 lakh crore. This is nearly 10 per cent less than what it would have been without the Covid recession.

If we assume that our GDP would continue to grow at the current 8.1 per cent recovery rate for the next few years, it will still take us another seven years to meet the old glide path. If Covid had never happened, the old 6.8 per cent growth rate would have taken our GDP to roughly Rs 300 lakh crore in 2030-31. That is when our post-Covid GDP will also hit that number, if it continues to grow at 8.1 per cent.

As of now, we have no reason to believe that the 8.1 per cent rate can be maintained. This is because the GDP growth rate has fallen from 9.1 per cent in 2021-22 to 7.2 per cent in 2022-23. There have been no Covid disruptions this year, while we are still seeing signs of release of pent-up consumption and investments which were stalled due to Covid. This suggests that our GDP growth rate is likely to settle around the 7 per cent range for the next few years. This is more than the RBI’s 6.5 per cent projection for 2023-24. In fact, if we take 7 per cent as the more likely growth rate for the next decade, it will take us eight years to touch the old pre-Covid GDP glide path. The two graphs will only meet in 2031-32.

But this does not tell us the full picture. To get that, we need to take a closer look at the national income and output data and break it up into various sectors. Agriculture, for instance, was unaffected by Covid. If anything, agricultural output increased even in 2020-21, the year of lockdowns and global supply-chain disruptions. Right now, gross value added in the farm sector is already higher than what it would have been had there been no Covid. This is largely because lockdowns were never implemented in rural areas, and we were blessed with three years of decent monsoon.

Manufacturing, on the other hand, has completely collapsed. It was growing at 6.4 per cent per year between 2013-14 and 2019-20. If that growth rate had continued, the factory sector’s gross value added (GVA) would have reached Rs 27.2 lakh crore in 2022-23. The current estimates say GVA in manufacturing stands at Rs 26.2 lakh crore. The average growth rate has dropped to 6.1 per cent. That means if the current rate of recovery continues, then we will keep moving further away from where our factory sector should have been. By 2030-31, the gap between the actual and the potential GVA in manufacturing will widen to nearly Rs 2.5 lakh crore.

When it comes to services, as a whole, it will take us another 13 years to touch our old glide path, if the current recovery growth rate continues. That too is because of the large category of ‘trade, hotels, transport, communication and broadcasting services’. This sector accounts for the bulk of service-sector jobs and accounts for nearly one-fifth of our GDP. If it continues to grow at the rate as it has in the past two ‘post-Covid’ years, then this sector will be back to the old glide path by 2026-27.

However, the key white-collar sectors are in big trouble. There are two categories: financial services, real estate and professional services; and public administration, defence and other services. Together, they account for about one-third of our GDP, and less than 10 per cent of all jobs. But, the bulk of white-collar jobs reside here. These include all bank and finance-related jobs, real-estate service providers, lawyers, doctors, IT professionals, teachers and government servants.

These two sectors have slowed down significantly compared to the old pre-Covid period. Together, they were growing at 7.6 per cent per year, between 2013-14 and 2019-20. They contracted by 1.5 per cent in the Covid year, rose by 6.5 per cent in 2021-22, and then 7.2 per cent in 2022-23. The average recovery growth rate is just 6.8 per cent. At this rate, these two segments can never recover to the pre-Covid glide path. This will have a significant impact on India’s white-collar middle class, as it will find it increasingly difficult to achieve its aspirations. That, in turn, will have a negative impact on the sales of goods that the middle class buys — small cars, Indian-made durables, affordable homes — and also on their savings. The top 1 per cent, which earns income from business, trade and assets, will continue to do well and corner more and more of the national income.

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