Two of the largest emerging markets aren’t firing on all engines in their respective growth stories. Amidst a weakening Chinese economy, India’s own economic position, as a large emerging market economy with a demographically positive employment base, offers greater optimism than some of the other emerging markets and the more industrially advanced nations.
The BJP government at the Centre, in the nine years since it was elected, has often harped on this signalling message to project ‘positive optimism’ and ‘strength’ for those betting big on India’s rising growth potential as against other nations. Efforts by foreign investors and firms to decouple from China did offer an opportunity to invest in the growing potential of the Indian market. However, not all has been well with India’s economy.
As we get closer into the 2024 Lok Sabha election cycle, it’s quite plausible to hear a lot more rhetorical activism, hype over reality, fiction over fact, around what the Narendra Modi government did right – in making India a ‘shining’ star amidst a universe of struggling, recession-affected, debt-ballooned economies.
A closer look at the Indian economy’s own macro numbers, however, paints a different picture.
There is more cause for trouble and skepticism than optimism. Yes, India’s potential is massive, but on evidence, we don’t see much optimism or hope in the current government’s handling of the economy and the direction of policy-craft for the economy’s medium-to-long term vision.
India’s GDP growth rate, in the past decade, hasn’t really picked up but has rather seen a declining trend since the post-demonetisation shock effect of 2016. The COVID-19 pandemic-induced nationwide lockdown caused a deep vertical fall in India’s already slowing growth rate, and the recovery ever since then has observed a ‘K-Shaped’ pattern, with an unequal trajectory, whereby, some income groups (with access to more factor resources) have made more wealth/money than those positioned at the mid-and lower bottom of the pyramid.
Gross Fixed Capital Formation (GFCF), an indicator that is critical for reflecting the productive capacity and (private) investment scenario for an economy, has been on a volatile-declining trend trajectory for India post-2021. A higher volatility in GFCF also reflects a weak investment demand and lower capacity utilisation for firms. While services have done reasonably well in the post-pandemic recovery scenario, industrial production and manufacturing growth remain woefully inadequate, in creating ‘good’ jobs and a better growth environment.
A positive data point from a bank and financial growth point of view is the gradual rise observed in the overall bank loan credit growth, which amidst the non-performing assets (NPA) crisis, was seen declining from 2018 onwards. The increase in loan growth or supply of loanable funds may be aiding the volatile rise of GFCF numbers, but a lot remains unclear on the ‘realised growth potential’ as much of these numbers hasn’t actively contributed to a sustainably higher growth trajectory.
At the same time, a rise in loanable funds will be a consequence of the nature of monetary policy anchored by the RBI and the fiscal policy of the Union government. So far, amidst rising inflation, higher interest rates (that affect borrowing-lending patterns) will negatively affect the ability of banks to provide cheaper credit to the private sector (assuming there is demand for such credit).
If we look at the numbers more closely, India’s core inflation rate has remained higher than the bank loan growth from late 2019 onwards till mid-2022, and since then, loan growth has jumped higher than the inflation rate. Over the last few weeks though, a higher inflation rate is threatening the banks’ abilities to continue providing more credit under the RBI’s status quo (in interest rate). On food inflation, price patterns have remained extremely volatile (reflected by a higher variance from the mean) and made the basic household consumption basket more expensive for the average income-earning citizen. This isn’t a recent phenomenon.
Now let us break down the core inflation trends. The Consumer Price Index (CPI) has continuously gone up since 2014 under the Modi government amidst stagnating and falling incomes for the middle and lower-income/consumption classes (see here). While the rural economy tatters and drags itself in almost a recession-style slowdown, price rise has made the situation for low-income earners worse. It is also severely hurting the ability of India’s urban middle-income earners to save, which is essential for creating liquid deposits with banks (who ultimately use deposit capital for designing their credit instruments and credit creation power).
The Wholesale Price Index (WPI), on the other hand, is sharply declining after 2022, which signals a deflationary spiral accentuated by a demand-side problem affecting the manufacturing/industrial sector. Private firms are finding less reason to be ‘optimistic’ (contrary to the prime minister and finance minister’s optimistic rhetoric on ‘India shining’) and aren’t investing big capital towards new production capacity, when the foreseeable demand for consumer and capital goods isn’t picking up-as expected.
Most private investment is otherwise being anchored by select big-capital business groups (like the conglomerates led by Gautam Adani to Mukesh Ambani) that have a monopolist advantage (from existing wealth endowments) for the purpose of acquisition of ‘new asset frontiers’ – for business expansion – and not for the objective of ‘investing in new capacity building for growth expansion’. It reflects the regressive state of alliance seen between big capital and the Indian state (signalling the rise of high cronyism and oligarchic capitalism).
On trade, exports have risen but at the cost of imports. The current account to GDP levels worsened to what they were prior to 2014 (before the BJP came to power). This reflects a failure in India’s industrial and trade policy to pivot towards areas where it was competitive and had a comparative advantage. This author has repeatedly argued for the potential for India’s rapidly growing service sector to not only contribute more to exports but also to jobs and overall growth.
Three key challenges for the post-2024 election scenario
Getting into the pre-election cycle, if one had to identify three principal challenges for the next government – whoever that may be – in terms of prioritising economic governance and social cohesion (as a precursor for a healthy economy), it would relate to the following three: 1) boosting the macro-employment rate for all; 2) raising private investment across sectors in a sustainable way, especially in labour intensive, job-creating areas; 3) tackling the high variance in core and food inflation, while managing the rising government debt for a fiscal consolidation plan that may actually work.
India’s tryst with a jobless growth era has only been prolonged in all of the Modi government’s elected terms. Growth in good-paying jobs (in the organised sector) hasn’t happened at the expected rate or pace, nor has been part of the priority for the government to address this in its fiscal-and budgetary allocations.
On the contrary, a rising government capex has come at the cost of lowering allocations for job security-based welfare programmes like MGNREGA. States have limited resources and tools to channelise resources towards worker-intensive growth plans or create jobs through their own fiscal interventions.
A lot of change has to come – driven by the Union government, which under Modi-Sitharaman has failed to even acknowledge that ‘job creation’ (and high unemployment) has been a challenge. A job-focused social security plan is also one of the most immediate needs of the hour.
The issue of raising private investment across sectors in a sustainable way has been raised and discussed earlier. This essay written earlier provides a detailed context-dependent, analytical summary of where the private sector has failed to align itself with the ‘optimistic’ nudges of the government’s fiscal push. In short, a higher capex-based spending outlay hasn’t really crowded in private investment. Thousands of crores spent on the Production-Linked Incentive (PLI) scheme hasn’t yielded positive growth – or job dividends too (see here for a detailed explanation by Raghuram Rajan).
The issue of debt concern needs closer attention. At a time when the Union government spending is proliferating (as a percentage of the GDP), and the government continues to squeeze the fiscal autonomy and borrowing capacity of the states (particularly those with an opposition government in power), the overall external debt borrowings and the government debt to GDP numbers are a cause of concern. It not only raises questions on the ‘effectiveness’ of a pre-designed fiscal consolidation plan but also on the viability of the BJP government’s spending or outlayed preferences.
One may continue to see the Union government spend more on PLI at the cost of spending less on welfare programmes, nutrition schemes and other social capital needs like healthcare and educational spending. But with a rising government debt concern (when growth is low), the fiscal space for the government to do more – both on capex and welfare – may shrink in the immediate years after the election. A narrative-control exercise adopted by subjugating critical data and independent critique on the Indian economy may do little good for any government in power that seeks to work for the benefit of its citizens for the next ‘24 years (2047’) or ‘1000 years’. In the last nine years, not only has the state of Indian policy witnessed abrasive democratic regression, a rise in communalisation and demonisation of ethnic minorities, loss in public institutional autonomy and centralisation of power by the Centre, but also seen a worsening picture in the growth potential of the Indian economy.
In the electoral battle for 2024, the BJP government (to come back to power), and the united INDIA opposition alliance (to defeat the BJP) may both require a clear, cohesive, economic plan and theory of economic change to address the structural woes plaguing the current state of the economy (with a medium to longer-term vision), while offering more than hollow optimism and rhetorical hype.
Deepanshu Mohan is an associate professor and director, Centre for New Economics Studies at O.P. Jindal University.