How PM Narendra Modi’s calibrated approach has helped turn around Indian economy

With more than 130 crore vaccine doses administered till date, with over 50 percent of the eligible population getting both the jabs and 85 percent getting at least a single jab, the Modi government’s response strategy to the COVID-19 pandemic has worked effectively despite rampant vaccine hesitancy that was propagated by a decrepit Opposition. Needless to add, the fast-paced vaccine drive has, in turn, spearheaded the ensuing economic momentum, with a focus on capital expenditure. Once the lockdown was eased, the expenditure policy of the Central government was geared towards higher capital spending and rightfully so.

The government budgeted a 34.5 percent rise year-on-year, in capex, to Rs 5.54 lakh crore for the current financial year, 2021-22. Large-scale fiscal spending by the government could have triggered inflationary concerns and nullified the impact of an easy monetary policy that has been in vogue now, for well over two years. Hence, in a smart move, the Modi government, despite opening the fiscal tap and being liberal in spending by giving growth a priority over all else, never really went overboard. And for sure, a calibrated fiscal approach has paid off.

To the RBI's credit, it was able to keep a lid on bond yields and the government’s borrowing programme was managed at an average interest cost of just 5.79 percent in the last fiscal, which is the lowest since 2004-05. In contrast, many developed and emerging economies that undertook large stimulus measures had to resort to increased short-term government debt to keep their economies afloat. For example, in Brazil, federal debt held by the public rose from 18 percent in calendar year 2019 to above 28 percent in the calendar year 2020. Due to buoyancy in tax revenues, the Modi government is in fact likely to achieve its fiscal deficit target of 6.8 percent in FY22, with no negative spillovers.

India’s economy continued to expand in the July-September 2021 quarter, marking the fourth consecutive quarter of growth. India’s GDP grew 8.4 percent year on year (YoY) in September quarter, against a contraction of 7.4 percent during the same period last year. Effectively speaking, GDP at Constant (2011-12) Prices in Q2 of 2021-22 (2QFY22) is estimated at Rs 35.73 lakh crore, as against Rs 32.97 lakh crore in Q2 of 2020-21 (2QFY21) and Rs 32.38 lakh crore in the previous quarter (1QFY22). 2QFY22 real GDP growth at 8.4 percent was in fact slightly ahead of consensus expectations. The higher growth, among other things, can be attributed to nine consecutive quarters of over 3 percent agriculture growth, which has had a multiplier effect on consumer spending.

A large part of the growth upside was also driven by spending on public administration, education, health, etc. Overall, the sharp turnaround from the Covid second wave was visible across all segments, making the growth broad-based in the September quarter. Investment growth remained strong even when compared to 2QFY20 (pre-Covid) levels. Growth will be well supported in 3QFY22 too, on account of the festive season and better performance from the Services' sector. Momentum remains well on track for a full-year GDP growth of 9.5 percent in 2021-22 (FY22), which is what RBI and global rating giant S&P are projecting too.

With a new Covid variant (Omicron) starting to spread globally, uncertainty on its impact on the global economic scenario may weigh upon things a tad bit, but on the flip side, this would essentially imply that rate increases globally will be more calibrated and not happen any time soon, assuming they happen at all to start with. No Central Bank would want to nip the greenshoots that have taken root by raising interest rates wantonly at this stage, despite the temptations given that headline inflation and bond yields globally have been on the rise, of late.

India, in fact, has done far better than global peers on the inflation front. Annualised inflation in the UK is 5.6 percent and 6.2 percent in the US, with inflation in the US the highest ever since 1990. In India, retail inflation in October 2021 was 4.48 percent and food inflation 0.85 percent, after a reading of 4.35 percent and 0.68 percent respectively, in September 2021.

While the RBI would continue with an accommodative stance, it will possibly wait for some more clarity before moving decisively on rates, though a reverse repo rate hike in February 2022 cannot be completely ruled out. The RBI’s excellent job in reining in bond yields at around the 6.35 percent levels and thereby keeping a leash on the government’s borrowing costs cannot be emphasised enough. In the US, yields have gyrated wildly from a low of less than 0.5 percent in 2020 to a high of over 1.74 percent in 2021.

The Q2 GDP growth data at a healthy 8.4 percent apart, the nominal GDP in September quarter stood at 17.5 percent. While the US is possibly into the sixth Covid wave, as per experts, and Europe in the last few weeks has also seen a big surge in Covid numbers, India has done a commendable job on this front, with over 130 crore vaccines administered. Both daily and weekly positivity rates are less than 1 percent and over 65 crore Covid tests have been conducted already. Multiple levers in the economy like Infra spend, low-interest rates, rising demand in the real estate sector and growing consumer demand are going to aid the GDP growth in the coming quarters. From the GVA perspective, farm, construction and public administration and defence services (PADS) grew faster than expected. The sharp increase of 17.4 percent in PADS was a big surprise in the 2QFY22 numbers.

The farm economy continues to display remarkable consistency, with agricultural growth of 4.5 percent in September 2021 quarter, after an equally strong 4.5 percent growth in the June 2021 quarter too. Importantly, the broad story remains intact. While capacity utilisation levels have improved, private investment is also on the mend, as corporates and banks are gradually shedding risk aversion, despite some nagging headwinds.

High commodity prices and global supply bottlenecks posed a challenge for the manufacturing sector worldwide. Tax collections aid government finances and it is here that the Modi government has seen big support from buoyant tax realisations.

The fiscal deficit was contained at 36.3 percent of budget estimate (BE) in first half of this financial year, even while expenditure picked up. The multi-year low fiscal deficit ratio can be attributed to robust revenue growth, outpacing expenditure rise, during the first half of the fiscal. Capital expenditure at 45.7 percent of the target also showed an encouraging trend in line with the government’s focus on asset creation.

The economic activity in Q2 FY22 received favourable support from recovery in manufacturing and construction. The gradual removal of lockdown, good monsoon year and the rapid pace of vaccinations helped boost consumer confidence. The risks arising due to the Omicron variant are unlikely to be a stumbling block to growth going forward. Continued low interest and easy liquidity policy will help sustain the tempo.

Mining, construction and real estate showed considerable growth in 2QFY22, at 15.4 percent, 7.5 percent and 7.8 percent respectively. A good monsoon year reflected well with high agricultural output. Private consumption is likely to pick up traction, as we complete normalisation. The private capex will likely catch up with government spending and aid growth even further. Gross fixed capital formation (GFCF) grew by a solid 11 percent in 2QFY22, after a massive 55.3 percent growth in 1QFY22. The data will have a positive bearing on the RBI's MPC meeting next week.

The low-interest excess liquidity policy has been paying good dividends, across most major economies. Going forward, the way countries across the globe handle rising inflation and movement of crude oil prices will have an impact on the growth rate across the globe. India, with a bumper crop, with food production in excess of 303 million tonnes in FY2021, the highest food output ever in the last seven decades, enjoys some inherent natural advantages which most large economies don’t.

During the July-September 2021 quarter, trade, hotels, transport, communication & services related to the broadcasting sector grew at 8.2 percent. Public administration, defence and other services grew at 17.4 percent during the July-September quarter, against 5.8 percent during the previous quarter. Government Final Consumption Expenditure (GFCE) came in at Rs 3.61 lakh crore in the second quarter of the fiscal year (2QFY22), against Rs 4.21 lakh crore in the previous quarter. GDP at current prices grew 17.5 percent. GDP at Current Prices in Q2 2021-22 is estimated at Rs 55.54 lakh crore, as against Rs 47.26 lakh crore in Q2 2020-21, showing a growth of 17.5 percent, as compared to 4.4 percent contraction in Q2 2020-21 (2QFY21).

Private final consumption expenditure grew to Rs 19.48 lakh crore in the July-September 2021 quarter, up from Rs 17.83 lakh crore in the previous quarter. The manufacturing sector grew by 5.5 percent in the September quarter while the construction sector grew by 7.5 percent. Both the sectors posted healthy growth, which bodes well for the economic trajectory going forward.

India's GDP at Constant (2011-12) Prices in Q2 2021-22 (2QFY22) is estimated at Rs 35.73 lakh crore, which is higher than the Rs 35.66 lakh crore seen in the first quarter of 2019-20 (1QFY20), signalling that India has recovered completely from the Covid-induced jolt. This speaks volumes about Prime Minister Narendra Modi's Aatmanirbhar Bharat initiative that has withstood the ravages of the pandemic without buckling in.

A robust construction sector, recovery in contact-intensive services, and pick up in government spending are supporting the services' sector, adding to the overall momentum. India's Eight Core Sector data recorded 7.5 percent growth during the month of October 2021. Eight Core Sector data came in at 15.1 percent during the April-October period, which is again good news.

After lagging the recovery during the initial phases, Q2 of this fiscal year saw services’ activity playing catch up. Relative control over new infections and a phenomenal increase in vaccination drive helped improve services' activity. Indeed, while few supply shortages weighed on manufacturing, the services' recovery scaled greater heights. Consumer and business optimism are improving sharply, leading to an uptick in job creation across sectors. Revenue receipts up to October 2021 stand at 12.59 lakh crore against the budget estimate (BE) of Rs 17.88 lakh crore. The fiscal deficit for the April-October period stands at 36.3 percent of the budget estimate of Rs 15.07 lakh crore. The fiscal deficit during the same period last year stood at 119 percent of the budget estimates.

The gross value added (GVA) in Q2FY22 has grown by 8.5 percent, as compared to a decline of 7.3 percent in the same quarter last year. In Q1 of FY22, the GVA had sharply surged by 18.8 percent.

Private Final Consumption Expenditure (PFCE) in the July-September 2021 quarter rose by 8.61 percent, year on year, after a solid rise of 19.35 percent Q1FY22. The gap between GDP and GVA was driven by higher tax revenue collection and lower subsidy pay-outs.

The sharp 10.1 percent growth in services in 2QFY22, the biggest sector in India’s economy, is reflective of overall momentum. In fact, services’ PMI accelerated to a 10.5 year high in October 2021. This came about even as local companies increased prices of their final products due to costly raw materials, driven by rising input and commodity prices globally. Interestingly, unlike their manufacturing counterparts, services’ companies hired more hands, resulting in job generation reaching the highest level after the pre-Covid period of February 2020.

Services’ PMI index rose to 58.4 in October 2021, from 55.2 in September 2021, which clearly signals that the third quarter of the current fiscal year of 2021-22 may witness even higher GDP growth. PMI numbers both for manufacturing and services for October 2021 endorse the fast-paced, V-shaped economic recovery that is underway.

GST collections of over Rs 1.3 lakh crore each, in October and November, bode well. In fact, the GST revenue in November 2021 is the second-highest monthly collection ever since GST came into effect in July 2017.

According to respondents of the PMI Services’ survey, ongoing improvements in demand boosted growth in sales and subsequently in output. New work intakes increased at an accelerated rate, the strongest since July 2011. Companies linked sales growth to better underlying demand and successful marketing. Firms were able to secure a healthy intake of new work, despite charging more for their services. Output prices rose at a solid rate, again, the strongest since July 2017.

Anecdotal evidence suggests that additional cost burdens were passed on to clients, reflecting the fact that purchasing power is back. Composite PMI reading in October 2021 came in at 58.7, the highest since January 2012, compared to 55.3 in September 2021.

Data by the Controller General of Accounts showed that the Central government spent 52.4 percent of its total expenditure target by October 2021, against 54.6 percent during the same period a year ago. However, the government exhausted only 36.3 percent of the year’s fiscal deficit target due to robust growth in revenue receipts. In effect, the Modi government has managed the growth versus inflation conundrum very effectively, without indulging in unwanted fiscal profligacy.

The Dun & Bradstreet Composite Business Optimism Index (BOI) for the ongoing quarter stands at 94.6, up 27.4 percent compared to the September quarter. Data shows five out of six optimism indices have registered an increase in the ongoing quarter, as compared to September quarter. Arun Singh, Global Chief Economist at Dun & Bradstreet, says that the GDP growth during the October-December quarter of 2021 (3QFY22) is likely to be much stronger as the BOI has surged to an almost eight-year high.

The survey shows that around 79 percent of the respondents expect the volume of sales to increase in the December 2021 quarter, compared to 67 percent in the quarter before. About 62 percent of the respondents expect an increase in net profits in the December 2021 quarter, compared to 48 percent in the September 2021 quarter.

In fact, the business optimism levels in the ongoing quarter are at their highest ever levels, since second quarter of 2014, as per Dun & Bradstreet, based on vital parameters like rate of hiring of new employees, output prices and inventory levels.

Clearly, if the 20.1 percent GDP growth in the June 2021 quarter was the harbinger of renewed economic momentum, the continued traction across all sectors and user segments in the September quarter cements the belief that the making of a V-shaped recovery in India is now a full-blown one for more reasons than one. The mega vaccination drive has been one of the key drivers of this “feel good” factor that is now translating into hard numbers.

The economic revival approach of the Modi government has worked far better than the strategy of pushing through huge fiscal stimulus packages, printing money and indulging in wanton pump priming, as has been the case with large parts of the Western world, which went about mindlessly announcing large packages, which ultimately failed to uplift those economies due to lack of a targeted approach.

The US and large parts of Europe are fighting runaway headline inflation without concomitant growth. Rather than ending up with demand-fuelled inflation and unsustainable deficits and debt, Prime Minister Modi’s calibrated approach has helped turn around the Indian economy without any major, associated upheavals.

As if on cue, Fitch, which had in October last year, predicted a GDP growth of 8.7 percent in 2021-22 (April 2021 to March 2022), marginally tweaked that number to 8.4 percent for FY22. But more importantly, Fitch has upgraded its GDP growth estimate for FY23 for India to 10.3 percent from the earlier 10 percent, on the back of underlying growth momentum, boosted by a rapid, consumer-led recovery and the easing of supply side disruptions.

The author is an economist, national spokesperson of the BJP, and the author of ‘Truth & Dare: The Modi Dynamic’. The views expressed are personal.​

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Sanju Verma