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Current State of Bharat’s Economy

Niranjan Bhombe

Rajshekhar Hariharan

24 November 2022

"With a GDP of $3.1 trillion, Bharat is the world's sixth-largest economy. The country has....."

With a GDP of $3.1 trillion, Bharat is the world's sixth-largest economy. The country has one of the highest GDP growth rates in the world. Bharat's GDP will likely grow by 8-8.5% in FY22, according to the 2021-22 Economic Survey.

However, there are wide disparities within the country's economy -- while 6.25%* of the total population pays income tax, it also has one of the highest numbers of billionaires in the world. The per capita income has risen rapidly in the recent past yet millions of people continue to live in extreme poverty.

1 - Bharat’s GDP growth has remained steady, stable and resilient


Steady: The economic growth in Bharat has steadily accelerated in the last fifty years without any prolonged reversals. The GDP has steadily increased from 4.4% in the 1970s and 80s to 5.5% during the 1990s and early 00s, and further to 7% in the late 2010s. The country aims to become a $5 trillion economy by 2025.


Stable: Post-1991 liberalization, the growth rate has not only accelerated it has also become stable. The transition of the economy towards a stable service sector has also helped add stability to the economy.


Versatility adds to resilience: The country's large spatially diversified economy, which is not dependent on a few products, commodities, or natural resources, has further added strength to it. Bharat engages with different trading partners spread across the world. Thus a slowdown limited to one part of the world will not result in a large impact on Bharat.


Covid-19 impact: In the wake of the nationwide lockdown in March 2020, the GDP growth crashed to 23.9%. In 2020-21, the overall GDP shrank 7.3% — this was the worst performance of the Bharat’s economy since independence.


2 - Food and fuel govern prices in Bharat

What causes inflation in Bharat? Inflation in Bharat is primarily driven by changes in the prices of food and fuel. The diversification of dietary patterns and a rise in per capita income have raised the demand for high-value food products such as meat, milk and fish in Bharat. A change in prices of crude oil is also responsible for inflation spikes in Bharat. In the recent past, supply-chain disruptions caused by the pandemic have also contributed to a rise in prices.


Is there an acceptable limit for inflation? The RBI's Monetary Policy Committee was asked by the government to maintain a target of 4 per cent with a band of +/- 2 per cent for Consumer Price Index (CPI) inflation for the next five years. In other words, any inflation figure within the band of 4% to 6% is considered acceptable by the central bank.


Covid-19 impact: Even before the spread of the Covid-19 pandemic, the CPI had crossed the RBI mandated upper limit of 6%. During the pandemic, as the demand plummeted prices of commodities came down. However, as the economy recovered from the pandemic, prices of commodities surged and CPI breached the 7% mark in October and November 2020.


The numbers: Bharat's retail price inflation rose to 5.59% in December 2021 from 4.91% in the previous month. It was the highest rate since July, remaining within the central bank's target range of 2-6% for a sixth consecutive period.


Bharat insight: $10 trillion GDP by 2030


For Bharat, developing late is going to be harder than developing early. For the early risers – Japan, South Korea, and China – a combination of free trade and low labor costs provided a critical jump-start. Bharat, with its protectionist policies and tough industrial labor laws, treaded a different path to seek growth in its services economy. A rising tide of protectionism, and automation that erodes developing countries’ low-cost advantage, mean growing its manufacturing sector now will be even more challenging. To get there, Bharat would need to unleash its manufacturing sector – requiring Prime Minister Narendra Modi to reform the rigid and politically fraught labor laws.

Bharat is in a better shape and is expected to be the fastest growing among the major economies. As a result, the economy has witnessed the highest inflows of equity portfolio investments in August 2022, reversing nearly a year-long trend. Several indicators relating to public finance demand and investments show that the Bharat’s economy is on an upswing.


Key highlights of Sep 2022: Bharat economy in a better position relative to other global economies on macroeconomic indicators

  • Growth projections for Bharat for 2022 are the highest across major economies. Bharat has also managed to contain the impact on inflation, interest rates and currency depreciation.

  • The economy, though resilient, remains vulnerable to crude price impact

  • Recovery in domestic demand is reflected in the growth rates of private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) over the corresponding quarter of the previous year.

Major sectors of the economy are on an upswing

  • Sectoral GVA growth indicates that only trade, hotels, transport et al. sectors are below its FY20 level.  This is despite the high growth in Q1FY23 over Q1FY22.

  • Construction after being severely impacted by the onset of COVID has recovered to just over pre-COVID-19 levels.  This trend is also reflected by an uptick in demand for housing loans.

Foreign trade and external sector

  • Services exports have continued to grow at a robust rate of 26% during April to July 2022, which has provided a cushion to falling goods exports growth.

  • On the other hand, non-oil imports of goods have increased by 34% in the April-July 2022 over the previous year. This is driven by a lower base, high commodity prices, and recovering demand in Bharat.

  • Similarly, while services imports growth is at 45% in the April-July period, when compared with 2019 (pre-COVID-19 normal period), the growth is lower at 22%, which may be driven by a recovery in business services and inflation.

Emerging economic scenario

  • Consumer demand in Bharat is reviving indicated by the increasing share of private consumption in total GDP and the growing GST collections.

  • Investments in passenger vehicles and pent-up demand for housing, ably supported by a pickup in growth bank credit for housing, auto, credit card and other personal loans.

  • Freight transportation, production of commodities i.e., cement and steel all are showing robust growth.

  • An uptick in investments and capital formation together with falling non-performing loans in the banking sector point to likely higher growth rates in the future.

  • Public finances remain healthy, providing the government with the cushion to contain fiscal deficit and increase the revenue expenditures which might boost demand.

  • A muted rural demand indicated by low growth in two-wheelers and three-wheelers sales.



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