Credit: DH Illustration
The Narendra Modi government has over the last nine years bet big on India’s rising growth potential as against that of other nations. The evidence paints a different picture on where India’s economic state has moved.
Gross Fixed Capital Formation, an indicator that is critical for reflecting the productive capacity and (private) investment scenario for an economy, has been on a volatile trend in India. 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, performance on industrial production and manufacturing growth remains woefully inadequate.
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 these numbers haven’t actively contributed to a sustainable higher growth trajectory. 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 central government. 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 that 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. The last few weeks show how a higher inflation rate is threatening banks’ ability to continue providing more credit under the RBI’s status quo (on interest rate). On food inflation, price patterns have remained extremely volatile (reflected by a higher variance from its mean) making the basic household consumption basket more expensive for the average income-earning citizen.
This isn’t a recent phenomenon.
In breaking down the core inflation trends, CPI has continuously gone up since 2014 under the Modi government amidst stagnating and falling incomes for the middle and lower income/consumption classes. While the rural economy is in tatters and drags itself into a 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).
WPI (Wholesale Price Index), on the other hand, is sharply declining from post-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 PM and FM’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 (Adani, 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 (signaling 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. This reflects a failure in India’s industrial and trade policy to pivot toward areas where it was competitive or had comparative advantage. There is potential for India’s rapidly growing service sector to not only contribute more to exports but also to jobs and overall growth.
Challenges Post-2024 Polls
If one had to identify three principal challenges for the next government (whoever may form it) in terms of prioritising economic governance and social cohesion (as a precursor need for a healthy economy), it would relate to the following three:
One, boosting the macro-employment rate for all; two, raising private investment across sectors in a sustainable way (especially in labour intensive, job-creating areas); and three, tackling the high variance in core and food inflation, while managing the rising government debt for a fiscal consolidation plan that may work.
India’s tryst with a jobless growth era has only been prolonged in all of the Modi years. 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 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 MGNREGS. States have limited resources and tools to channelise resources toward worker-intensive growth plans or create jobs by their own fiscal interventions.
A lot of change has to come and be driven by the central 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.
As for private investment, 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 PLI scheme hasn’t yielded positive growth, or job dividends, either.
The concern over government debt needs closer attention. As the central government spending is proliferating (as a percentage of GDP), and the government continues to squeeze the fiscal autonomy and borrowing capacity of the states, 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 government’s spending preferences.
Whether it is the I.N.D.I.A alliance or the BJP/NDA, an honest, critical reflection on the state of the economy, along with a viable medium-to-long-term action plan for post 2024, addressing some of the discussed structural woes, remains pivotal in realising the optimism around India’s growth/development potential.
(The writer is Director, Centre for New Economic Studies, O P Jindal Global University)