The 6.7% gross domestic product (GDP) growth logged for the first quarter of this fiscal was broadly in line with our expectation.

The unusually long election cycle, spanning two-and-a-half months of the first quarter, delayed consumption and investment spending by the government, resulted in the onquarter slowdown.

However, private consumption picked up significantly in the first quarter after the second-lowest decadal growth in the previous fiscal (the lowest was the pandemic year). A large part of the increase in consumer demand was due to improving rural conditions, as reflected in brisk two-wheeler sales.

Also, growth in fixed investment accelerated despite low government capex, indicating private investments (i.e. household and private corporate investment) picked up the slack.

We expect private consumption and investment to stay healthy for the rest of the fiscal. They will benefit from increased government spending on employment and asset creating schemes as well as pick-up in the government-funded infrastructure buildout.

Also, the GDP to gross-value-added gap has narrowed, with the disturbance in taxes and subsidies from the pandemic and post-pandemic recovery normalising. The substantial gyrations in the GDP deflator are subsiding as well. Hence, the GDP will be less impacted by these factors in coming quarters.

Net-net, the economy is on track to print 6.8% growth this fiscal.

That’s the bigger picture. However, India’s overall GDP and other national data hardly reveal how its constituent units are faring.

This month’s theme looks at the fiscal dimension of interstate variations, which gains significance as the 16th Finance Commission (FC) is currently trying to refine the modalities of Centre-state transfers.

The Centre collects most taxes and devolves them to the states via the FC-prescribed methodology. The commission decides on both the vertical (share of all states in central taxes) as well as horizontal devolution (how the share of states will be divided among them).

Our analysis shows while overall transfers from the Centre to the states rose under the 15th Finance Commission versus the 14th, the share of untied funds has come down.

The analysis also highlights that the central government is now playing a larger role in driving government capex. This is despite the improving quality of spending in many states since they are borrowing more for undertaking investments.

The reason is the central government’s extraordinary push on infrastructure capex via the budget as a part of the post-pandemic recovery strategy.

Read on for other nuances.