Disconcerting Trends in the Economy
Sanjay Roy
THE recovery of the economy immediately after the pandemic was reflected through positive and increasing growth in various sectors as businesses were back to normalcy. Much of these growth rates have been reflective of the pent up demand accumulated due to lock down and related disruptions. India records a relatively high growth rate compared to other countries and is estimated to be the second largest contributor of regional growth after China. Nonetheless the signs of chronic ailments of the economy were visible before the pandemic which reminds us of the fact that a growth accompanied by rising inequality and high unemployment rate is highly unsustainable.
According to the official estimates, Indian economy is expected to grow at a rate of 6.5 per cent in the FY 2023-24 and it maintained an average growth in the range of 6-7 per cent which went upto 8 per cent in the past decade. What is significant is that even if we have overcome the pandemic led shocks the recovery does not seem to take us back to the earlier scenario of high growth path. True that the global growth is still not expected to be very exciting but that didn’t prompt our policy makers to focus more on policies that rely on domestic demand. The three critical engines of growth leaving aside government expenditure that is consumption, investment and foreign trade do not actually show accelerating growth. In case of India recent figures show that private final consumption expenditure accounts for 60 per cent of GDP and investment or gross fixed capital formation shares 30 per cent of GDP. Hence growth primarily depends on the growth of consumption expenditure and investment.
SLOW CONSUMPTION GROWTH
The decadal average growth of private final consumption expenditure in the decade before the pandemic in India was 6.6 per cent per annum. Consumption expenditure shrank during the pandemic but recovered positive growth in 2021-22 and 2022-23 recording 11.2 per cent and 7.3 per cent growth respectively. In spite of the fact that consumption expenditure recorded high growth in the post pandemic period primarily because of the base effect and it was expected to moderate as situations settle down, but CMIE estimates a growth of private final consumption expenditure in 2023-24 to be 5.1 per cent. This actually means even if consumption expenditure has recovered it still falls short of the pre-pandemic decadal average growth rate. The official estimate of an overall growth rate of 6.5 per cent for the financial year 2023-24 comes under pressure because India’s growth is primarily driven by consumption expenditure and a slow recovery in consumption implies that overall growth recovery is likely to suffer.
It once again points to the structural problem that a growth trajectory that is exclusionary accompanied by rising inequality and joblessness is likely to falter. It is also important to note that inflationary pressures have definitely begun to ease, with CPI inflation in March 2023 declining to 5.7 per cent and WPI inflation has further eased to 1.3 per cent due to lower prices of manufactured goods, fuel, and power. This only indicates that the rate of increase in prices has cooled down which is important from policy angle but for the common people it is even more important that prices of consumer goods measured by CPI general index have increased by 19.2 per cent in the past three years comparing figures of 2020 March to 2023 March. This has cumulatively reduced purchasing power of people in the recent past.
The government’s official reports also acknowledge two important potential risks which may further create spikes in price. One is increased volatility in crude oil market due to OPEC+ countries deciding to cut crude oil production from May 2023 and also forecast of El Nino phenomenon that is going to affect kharif output with major impact on food grain, oilseeds and cash crops such as sugarcane and cotton. These may create inflationary pressure once again in the near future. Due to reduction in inflation rate the repo rates this time are kept unchanged but the fact remains that scheduled commercial banks have increased lending rates by 170 basis points to 9.3 per cent in the last one year. This has impacted the household consumption expenditure in two ways. Firstly, it increases the servicing cost of existing loans and since EMI accounts for about 3 per cent of average consumption expenditure of Indian households, it leads to cutting down of other expenditures as a result. Secondly, this rise in interest rates affect credit based consumption expenditure particularly of durable consumer goods and other sorts of discretionary expenditure. In the past one decade the share of durable consumer goods in average Indian basket has been as low as 3.3 per cent. The recent figures of Index of Industrial Production for the month February 2023 reports a 4 per cent decline in growth of durable goods production over the corresponding period of previous year. CMIE’s pan India household survey suggests only 24 per cent of Indians believe that it is a better time to buy consumer durables.
MANUFACTURING AND EXPORTS
A low share of durable consumer goods in the consumption basket on the other hand explains the stagnating manufacturing growth in India. Large share of manufacturing activities is directly or indirectly linked to production of durable consumer goods and a contraction in that segment is reflective of the fact of slowing down of consumption expenditure. According to IIP figures manufacturing sector in 2022-23 grew by 4.9 per cent which was a moderation of high growth recorded in 2021-22 of 13 per cent. But out of 23 sub-groups in manufacturing only 12 recorded positive growth in 2022-23. During the last quarter of 2022-23 sectors such as textiles, wearing apparel, leather and related products, fabricated metal products which are relatively labour intensive in nature recorded a contraction. The pent up demand particularly of the poor and the lower middle class seems to be waning out fast. In such a scenario of not so exciting expectation of profits, investment growth can only be moderate, as has been the case despite increase in capital expenditure by the government.
In the external front the expectations are not so encouraging. According to the latest World Economic Outlook, world output growth rate is expected to slightly improve to 3 per cent in 2023-24. Amidst supply chain disruptions due to war and also because of the effect of financial tightening, global trade is not likely to grow very fast. Recent trade data released by the RBI show that current account deficit of India narrowed to 2.2 per cent of the GDP in Q3 of 2022-23 compared to 3.7 per cent in Q2 and 2.7 per cent in the corresponding quarter of the previous year. This has happened as a combined effect of several factors. A moderation of merchandise trade deficit happened because imports grew at a rate lower than the growth of exports, there is steep rise in net services exports particularly a surge in IT and business services exports and increase in remittance by Indians employed overseas. But India’s exports have shrunk for the second month in a row if we compare year on year basis with March 2022 to the tune of 13.9 per cent and Non-POL exports fell by 5.2 per cent compared to March 2022. India’s exports of textile, gems and jewellery and plastics declined compared to previous year.
Given the gloomy world output growth, relying on exports can’t be a prudent strategy in enhancing growth. But a declining growth in consumption demand is something that can be corrected through altering policy focus. Unemployment rate continues to be as high as 7.8 per cent with decline in fresh hiring of professionals. Decline in labour force participation rates, high unemployment particularly among youth and a continuing low wage regime with rising inequality is what that needs to be corrected immediately through radical change in policies.
