Under the hood

The post-Covid macroeconomic fundamentals of the Indian economy are sound.

- RATHIN ROY

Since financial year (FY) 2022, gross domestic product (GDP) growth has averaged 7.2 per cent. Consumer price inflation has oscillated between 5 and 6 per cent. The current account deficit is extremely comfortable, averaging between 1 and 2 per cent of GDP. The general government fiscal deficit is also under control at around 9 per cent of GDP in FY23, down from 13 per cent in FY21, and is expected to fall further this fiscal year. Tax revenue targets, though modest, are being met comfortably. Gross capital formation at 33 per cent of GDP and gross saving at around 31 per cent of GDP are adequate to support an average growth rate of 7 per cent.

Looking at the performance of the Indian economy as one would look at the performance of an automobile while seated in it, things appear to be going smoothly. However, under the hood, there are issues that merit close attention

Private final consumption expenditure is growing slower than GDP, indicating a slowdown in aggregate demand. This could be due to an increase in investment, but private investment has been declining as a share of GDP, a trend observed since FY12 but now exacerbating. In FY24, fresh investments announced by the domestic private sector have fallen by 15 per cent; foreign investment in fixed capital formation has also declined. Historically, when growth rates rise, private consumption growth picks up, as new investments create jobs and earnings are lifted by increases in growth. But this is not happening.