LINK: https://www.thehindu.com/opinion/editorial/cautious-optimism-on-india-and-growth/article70345469.ece
Why in the News
Recently, India’s September-quarter GDP data for current financial year was released, reporting 8.2% growth. This figure, higher than 7.8% in Q1 FY26 and year-ago period, offered fleeting reassurance to policymakers amidst existing economic uncertainties.
Key Drivers of GDP Growth (Q2 FY26)
Growth momentum was broad-based, suggesting an uptick in domestic activity despite global headwinds.
Sectoral Contribution (Gross Value Added)
- Services sector growth recorded at 9.2%.
- Manufacturing sector growth registered at 9.1%.
- Construction sector grew by 7.2%.
- Financial, real estate and professional services sub-segment of services surged by 10.2%.
Demand-Side Components
- Private Final Consumption Expenditure (PFCE), proxy for consumer spending, grew by 7.9% (compared with 6.4% in Q2 FY25).
- Government spending provided a modest boost.
- Investment Activity was supported by RBI’s three repo-rate cuts this year, lowering policy rate to 5.5% in June.
High-Frequency Indicators
- Monthly industrial indicators reinforced momentum, with IIP rising 4% in September.
- Core capital-intensive categories recorded strong gains: steel at 14.1% and cement at 5.3%. This suggested that capital-intensive, infrastructure-linked sectors had been central to this momentum.
Underlying Concerns and Statistical Effects
Despite encouraging headline growth, its sustainability and quality are subject to scrutiny.
External Shocks and Trade Deficit
- Quarter’s growth followed October’s trade data revealing a historic deficit of $41.68 billion.
- Deficit was driven partly by a trebling of bullion imports, signalling economic uncertainty.
- Full effects of external shock may surface in quarters ahead, particularly the U.S.’s ‘two-stage’ India tariffs landed mid-quarter in August.
- Front-loading of export orders ahead of these tariffs may have inflated Q2 output.
Statistical Effects of GDP Deflator
- Retail inflation fell to 0.25% in October, lowest in current CPI series.
- This low inflation contributed to a GDP deflator reported to be below 1%.
- A deflator this low mechanically inflates real GDP relative to nominal GDP.
- Narrow gap between nominal GDP (8.7%) and real GDP (8.2%) underscored this statistical effect.
Skewed Composition of Growth
- Crucially, composition of growth remained skewed.
- Expansion was driven by capital-intensive and higher-skill sectors—including banking and technology.
- High-employment, labour-absorbing sectors continued to lag.
- Growth spurt appeared concentrated in better-paying formal sectors, even as low-income, export-linked, labour-intensive segments struggle.
- IIP data for past six months pointed to weak rural consumption.
Challenges and Outlook
- External-sector vulnerability demonstrated by historic trade deficit of $41.68 billion and large bullion imports was highlighted as major challenge to sustainability of growth momentum.
- Statistical fragility of real GDP measurement due to very low inflation and low GDP deflator was highlighted as danger for overstating real growth if inflation were to firm.
- Sectoral imbalance in growth composition with tilt toward capital-intensive and high-skill sectors was reported as challenge for employment generation and inclusive growth.
- Rural demand weakness and lag in labour-absorbing sectors were reported as structural concerns requiring policy attention.
- Policy uncertainty around upcoming RBI Monetary Policy Committee decision was reported as potential influence on demand-side conditions and growth trajectory.
Policy Implications
- Monetary policy stance was reported as critical determinant of demand pressures, and RBI actions were implied as having potential to either sustain or moderate growth momentum.
- Fiscal support through government spending was reported as providing modest boost, and continuation of targeted fiscal measures could be inferred as necessary to support lagging segments.
- Diversification of crude imports away from Russia was reported as having potential to raise oil prices and input costs, indicating need for strategic energy and trade policy consideration to stabilise growth.
- Export-order front-loading in response to external trade measures was reported as creating potential statistical distortions, highlighting interplay between trade policy and growth measurement.
Way Forward
- Sustained monitoring of growth indicators including real-nominal GDP gap, inflation trajectory, and trade balances should be prioritised to assess durability of recent uptick in activity.
- Policy calibration must be informed by signals from IIP, sectoral GVA, and consumption trends, with attention to support for labour-absorbing and rural-oriented sectors so that growth gains are widely shared across income groups and regions.
- Monetary-policy decisions should be aligned with inflation outlook and growth fundamentals so that demand-side pressures are managed without undermining investment momentum generated by earlier repo-rate reductions.
- External-sector risks posed by large trade deficit and bullion import surge should be addressed through trade policy measures, external-balance monitoring, and prudent exchange-rate and reserve management to avoid sudden macro adjustments that could derail growth trajectory.
- Structural measures aimed at boosting employment in labour-intensive sectors, and at strengthening rural demand, should be prioritised to reduce skew in growth composition and to ensure that recovery is broad-based and resilient to external shocks.
Conclusion
- While September-quarter GDP data provided strong indication of economic resilience and broad-based domestic recovery, caution is warranted.
- Statistical effects related to low deflator, concentration of growth in formal and capital-intensive sectors, and persistence of external risks suggest premature conclusion about sustainability of this pace would be unwise.
- Coordinated policy focus must be maintained to ensure growth momentum is sustained and spread inclusively across all segments of economy.
UPSC MAINS PYQs
- Faster economic growth requires increased share of the manufacturing sector in GDP, particularly of MSMEs. Comment on the present policies of the Government in this regard. (2023)
- Explain the difference between computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (2021)
- Define potential GDP and explain its determinants. What are the factors that have been inhibiting India from realizing its potential GDP? (2020)
- Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)
- “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) in the post-reform period.” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (2017)
