Indian Economy: Reality Check

Amidst the bevy of low performing economies India has outshined the rest.Yet it needs to grow stronger to alleviate such persistent ailments as poverty , unemployment,etc. — KK Srivastava

According to latest OECD projections India is likely to grow at 6.9% during the current fiscal. But next year the rate will be 5.7% due to softer external demand. During the calendar year 2023 the world economy may grow at merely 2.2%. Indeed, the global growth is slowing rapidly but inflation is persistently high. During 2022 it is likely to be 8.2% while during 2023 it may go down to 6.6%. These figures too will hold only if covid does not rear its head again, Ukraine war does not escalate further, or energy prices do not soar up even higher. Central banks are hiking their interest rates.  

All this has implications for India. There will be pressure on currency, with attendant pressure on financial conditions and other variables. Already during April-June quarter Indian economy grew 13.5%, at a rate lower than what markets and RBI had expected. Over the next few quarters, the growth is expected to slow further. The first contributory factor will be exports which have been major drivers of India’s post covid recovery; these will slow down in view of impending global recession. Second, earlier these was a pent-up demand for services (and hence revenge buying and binging); this may begin to fade. Then, the supply chain problems, long term reconfigurations, and geopolitical tensions will continue to keep commodity prices, including those of energy, at elevated levels. Under such conditions broad based reforms are needed. Merely wondering as to why private sector is not investing will mean nothing. It is a little consolation that, as Morgan Stanley has predicted, India is likely to be the fastest growing Asian economy in 2022-23. Hiding behind faceless numbers is an exercise in vain. 

India has overtaken UK to become the fifth largest economy in the world. But this is chimera. Let’s look at what is available to each citizen, a mere pittance in comparison to on average UK citizen. The macro number does not reveal how the outcomes of economic activity are distributed (indeed how unequally!), nor does it talk about prevalent poverty and unemployment. It is also not a report on the degradation of natural environment. In short, the focus on GDP alone fails to highlight the true picture of the economic conditions of an average citizen. Nor does it reveal the environmental costs incurred in making material advancements.

In term of per capita incomes, India is ranked 144 out of 194 countries; in Asia itself it is ranked 33rd. The richest country in per capita income has an income 60 times higher than that of India. In terms of economic inequality, the world inequality report reveals that the top 10% of Indians earned 57% of all income and owned 77% of national wealth. The bottom 50% earned only 13% of income, according to a report in the Telegraph. IMF estimates India’s per capita income in 2021 of nearly $2200. But if we take into account the degree of inequality and exclude the incomes of the top 10% than the per capita income may actually be around $1,000 only. Another estimate suggests that in textile industry (just an illustration) if a minimum wage earner were to wish to earn the salary of the CEO, it would take him nearly 950 years to reach there.

Recent estimates by OXFAM suggest that nearly 60 million Indians, are pushed back into poverty due to lack of access to health facilities alone. Lot of people slipped below poverty line due to pandemic. And, finally, India ranks at the bottom out of 180 countries on environment performance index. 

All this is not to belittle what all India has achieved post-Independence. Rather, it is to caution that it is not time to gloat over the increasing economic size of the Indian economy. We need to grow at a minimum of 8% per annum for the next 25 years to make a real dent in our miseries and be counted as a middle-income nation. Until then the fact that in purchasing power parity terms India, with a 7.24% share in world GDP in 2022, ranks 3rd in the world brings little solace. Yet, to be sure, the economy needs to grow at a fast clip. For this both consumption and investment are needed, especially when global demand is not likely to come forth to our rescue. 

Exports have already slowed down and likely to remain subdued in near future. Then the government is also committed to meet tight fiscal deficit targets. In the event private capex is needed to help boost the economy. The finance minister was annoyed that despite a lower corporate tax rate and production linked incentives the private sector has failed to commit adequate investment numbers. According to RBI the FY22 private investments remained well below the peak level of FY13 or even FY20. Well, the reasons may be many.

Demand destructions caused by the pandemic and associated restrictions have moderated now; trade and mobility both have picked up. But even before covid, Indian economy in recent times has never touched the sustained high investment levels witnessed in high growth years of 2000s. Unless companies see demand returning to the economy, they will not commit fresh sums. While there is uncertainty about the actual path of domestic demand, the global headwinds in the path of demand, and therefore supply enhancement through fresh investment, are causing additional roadblocks. Already accumulated inventories need to run down first. Many large trading blocks have still not reached the import figures earlier. Galloping inflation (in India and worldwide), geopolitical tensions, cuts in growth expectations (again, for India and for the world as a whole) and many other factors paint a less than rosy picture. Prices will likely be subdued in face of muted demand; this will mean reduced earnings prospects, which in turn is likely to negatively affect companies’ incentives to invest. Add to this the legacy issues and industry specific challenges, and the picture becomes even more gloomy. Fresh capex boom partly depends on emergence of new promoters who should be financed by lending institutions. While PLI scheme is a positive step, private investors are still gauging the ROIs on the first set of such projects. Moreover, earlier capex cycles were driven by giants making big bets during commodity super cycles. But due to commodity collapse since 2011, these giants are now no more interested in greenfield projects; only consolidation and acquisitions are being undertaken. Third, in some sectors (automobile is one example) disruptions have made investment decisions difficult. Finally, foreign capital is now less interested in traditional manufacturing and more in areas like telecom, BFSI, retail, technology etc. We need to invest more in technology and talent, and less on land or machinery to invite capex. Policy environment has to change accordingly. All this and more is needed, but is missing, for an across the board surge that can not only ensure economic growth but also lift the boat for all the fellow travelers. But at present moment lack of confidence is overshadowing pep talk and animal spirits. 

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