Four Factors That May Impact India's Projected Economic Growth of 6.5% in FY24

Declining manufacturing activity, a slowdown in the services sector, rising unemployment, and air pollution may pose a challenge to India's projected economic growth.

New Delhi: India is projected to record an economic growth of 6.5% for the fiscal year 2023-2024. However, four factors – declining manufacturing activity, a slowdown in the services sector, rising unemployment, and air pollution – may have the capacity to impact this projected target.

PMI services at a seven-month low

India’s services sector experienced a slowdown in October, with the Purchasing Managers’ Index (PMI) dropping to a seven-month low of 58.4 from 61 in September, according to a private survey.

The survey has attributed this decline to reduced demand, price pressures, and competitive conditions.

The survey polled around 400 companies in non-retail consumer services, transport, information, communication, finance, insurance, real estate, and business services.

It noted, citing anecdotal evidence, that while growth has been weakest since May, it has remained substantial, driven by customer interest and successful advertising. It added that fierce competition and subdued demand for certain types of services dampened the overall expansion.

Pollyanna De Lima, economics associate director at S&P Global Market Intelligence, said the Indian service economy continued to register impressive growth, despite the increase in business activity and new work intakes softening from September’s over 13-year highs, Business Standard reported.

“Several companies managed to secure new contracts, but some mentioned subdued demand for their services and competitive conditions. Exports were an area of particular strength in October, with new business gains from Asia, Europe, and the US boosting growth to its second-highest in the series over nine-year history,” she added.

Also read: Five Issues That Are Hurting the Indian Economy

Manufacturing activity falls to an eight-month low

The slowdown in the services growth follows the decline in manufacturing activity in the last month.

Rising cost pressures and a decline in demand for consumer goods dragged down manufacturing activity in October, which grew at the slowest pace in eight months.

A recent Reuters poll showed demand during the festive season would bring some cheer to the economy, however, it would not be enough to ramp up the speed of economic growth.

Pollyanna De Lima, economics associate director at S&P Global Market Intelligence, noted, “India’s manufacturing sector generated substantial growth in October, despite a challenging global economic environment.”

“Still, insights from surveyed purchasing managers pointed to the deceleration of several measures.”

The slowdown in both manufacturing and services indicates low production and productivity. That could mean that fewer goods are being produced and fewer jobs are being offered.

Unemployment at a two-year high

Separately, India’s unemployment rate rose to a two-year high of 10.09% in October, Bloomberg reported citing data from the Centre for Monitoring Indian Economy (CMIE).

However, the Periodic Labour Force Survey (PLFS) data for July 2022 to June 2023 showed that India’s unemployment rate for individuals aged 15 and above has reached a six-year low, standing at 3.2%.

According to the PLFS data, a larger number of individuals are self-employed than those in casual labour and the regular salaried class.

“The share of self-employed [people] in the total workforce is increasing, and within that most of the increase can be seen among unpaid family labour and own account workers,” Santosh Mehrotra, professor of economics, Centre for Informal Sector and Labour Studies, School of Social Sciences, Jawaharlal Nehru University, told The Wire.

He explained that people are choosing to be self-employed, because of a lack of good work and wages.

Economists have come to rely on CMIE data for a better assessment of the labour market as its figures are based on monthly surveys as opposed to government data, which releases country-wide data less frequently, Bloomberg‘s report said.

In May, CMIE chief Mahesh Vyas had told The Wire that India’s workforce is not rising in relation to its increasing working age population. He added India’s workforce has largely remained stagnant at a little over 400 million in the past five years, and that the quality of jobs in India is very low.

All these factors can have an impact on the Indian economy which is projected to rise by 6% to 6.5% this year.

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Air pollution

“Air pollution has a direct, and a particularly debilitating impact on GDP growth and per-capita income levels by way of reduced worker output, lower consumer footfall in consumption-led services, hampered asset productivity, and a surge in health expenses and welfare allocations, especially in the productive age groups,” the Indian Express reported.

When we consider the consequences of recurring annual pollution cycles in key manufacturing and service centers, the strain on economic productivity becomes considerably more significant, the newspaper said.

A World Bank paper said there’s clear evidence that “the well-documented micro-level impacts of air pollution on health, productivity, labour supply, and other economically relevant outcomes aggregate to ‘macro level effects that can be observed in year-to-year changes in GDP’.”

“The effect is non-trivial – the median annual increase in the level of PM2.5 reduces year-to-year changes in gross domestic product by 0.56 percentage points,” the report said.

The Indian Express quoted an RBI report saying that the trend is a concern because in India, employment generation is still largely linked to economic activities involving the outdoors, such as in agriculture and construction. These two are among the biggest employment generation sectors. Delivery services and security agency work also account for the bulk of employment generation options in the urban areas, it said.

However, the impact of air pollution is not restricted to those working outdoors. “Even in indoor jobs such as those in call centres, air pollution takes a toll on productivity,” it said.