• UGI USER
  • Jan 10, 2024
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GROWTH SANS DEMAND

Government spending seems to be propping up growth

 

Relevance:

GS 3

  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Why in News:

India’s GDP is projected to grow by 7.3% in the financial year 2023-24, as per the First Advance Estimates (FAEs) released by the government.

Source- Mospi

The first advance estimates of national income for the current fiscal year indicate a heavy reliance on government spending to drive economic growth. While the National Statistical Office (NSO) predicts a marginal increase in real GDP growth to 7.3% from the previous year’s 7.2%, a closer look at sectoral output and demand data raises concerns about the sustainability of consumption-led growth.

Slowdown in Gross Value Added (GVA):

  • Overall, Gross Value Added (GVA) growth is expected to slow down to 6.9% from the previous fiscal year’s 7%.
  • The agriculture, livestock, forestry, and fishing sector, a vital contributor to the rural economy and job market, is projected to expand by a mere 1.8%, its slowest growth in eight years, and less than half of the previous year’s 4% growth.
  • Challenges like a shortfall in kharif output and delays in rabi sowing, especially in paddy and pulses, could further dampen growth prospects.

Services Sector Struggles:

  • The services sector, particularly encompassing trade, hotels, transport, communication, and broadcasting, is set to witness a significant slowdown in growth, dropping to 6.3% from the previous year’s 14%.
  • This trend aligns with the NSO’s November 30 release of second-quarter GDP estimates, highlighting a loss of momentum in the post-pandemic rebound in services.

Demand Woes:

  • Private final consumption expenditure, historically the largest GDP component with a share exceeding 60% in the past, is expected to record its slowest non-pandemic year expansion in over two decades.
  • Private consumption spending growth is estimated at 4.4%, marking its lowest point since the pandemic-induced contraction of over 5% in 2020-21 and only slightly more than half of the 7.5% pace observed in 2022-23.
  • Challenges in the rural economy, including monsoon variations and weakened farm output, have hindered the recovery of demand for various products, from soaps and detergents to packaged foods and two-wheelers.

Other Key Estimates for 2023-24:

  • Gross Value Added (GVA): Expected to marginally decrease from 7% in 2022-23 to 6.9%.
  • Fiscal Deficit: Likely to surpass the target of 5.9% of GDP, reaching approximately 6%.
  • Farm Sector GVA Growth: Estimated to decline from 4% to 1.8%.
  • GVA in Trade, Hotels, Transport, and Communication: Projected to moderate to 6.3% from 14% in 2022-23.
  • Manufacturing GVA Growth 2023-24: Expected to accelerate to 6.5%, significantly higher than the previous year’s meager 1.3% growth.
  • Mining GVA Growth: Anticipated to increase to 8.1% in 2023-24, up from 4.6% in 2022-23.
  • Overall Economic Growth: The real growth rate for the economy is estimated to be 7.3% in 2023-24.
  • Future Projections by S&P Global Ratings: India is expected to maintain its position as the fastest-growing major economy over the next three years. Projections indicate that India is on track to become the world’s third-largest economy by 2030.

Government Capital Spending as a Driving Force:

  • Gross fixed capital formation (GFCF), which includes government capital spending, remains a bright spot and a key driver of economic momentum.
  • The NSO predicts GFCF to grow by 10.3%, reaching a record 34.9% share of GDP for the fiscal year.

Policy Dilemma:

As the general election approaches, policymakers are faced with a challenging decision:

  • Maintain high government spending to support growth, risking fiscal slippage.
  • Tighten fiscal control to address economic vulnerabilities, potentially leading to further loss of momentum in the economy.
Advance Estimates Explained:

·   Source of Advance Estimates: The Central Statistics Office (CSO) is responsible for releasing advance estimates of GDP.

·   Data Compilation Process: These estimates are derived by analyzing data from previous years and surveys conducted by various ministries.

·   Sector-Specific Estimates: Advance estimates cover various sectors, such as agriculture and horticulture, providing forecasts for the upcoming fiscal year.

·   Timely Data Release: These estimates are referred to as “advance” because they are released several months before the conclusion of the fiscal year.

Types of Advance Estimates:

 1st Advance Estimates:

·   Typically released at the beginning of January.

·   Provides an initial projection of GDP growth for the following fiscal year.

·   Data does not include the third fiscal quarter (Q3) and is mainly used for budgetary planning.

2nd Advance Estimates:

·   Released in the last week of February, following the annual budget announcement.

·   Offers an updated GDP growth projection for the fiscal year.

·   For 2021-22, GDP growth was estimated at 8.9%, a significant increase from the previous year.

3rd Advance Estimates:

·   Includes specific data related to agriculture and horticulture.

·   Compiled from state and union territory information and various surveys.

·   In 2020-21, advance estimate horticulture production stood at 331.05 million tonnes, a 3.3% increase from earlier estimates.

4th Advance Estimates:

·   The final quarterly advanced estimates before the fiscal year concludes.

·   Focuses on agriculture crop production.

·   In 2020-21, agriculture production reached 308.65 million tonnes, nearly 11 tonnes higher than previous estimates.

 

Gross Value Added (GVA):

Gross Value Added (GVA) quantifies the total economic value of all goods and services generated within a country’s borders. It arrives at this figure by subtracting the expenses incurred for inputs and raw materials directly related to their production.

Expenditure Method:

The expenditure method is a technique for calculating Gross Domestic Product (GDP) by aggregating various components, including consumption, investment, government spending, and net exports. This approach focuses on the demand side of the economy and is the most commonly employed method for estimating GDP.

 

Source

The Hindu

Mains Question

Discuss the implications of heavy government spending on economic growth, as evidenced by the first advance estimates of national income for the current fiscal year. Analyze the challenges faced by various sectors and the underlying factors contributing to the growth slowdown.