An unfolding economic tragedy

A reflexive cheer of India as the fastest-growing major economy rang out when the National Statistics Office (NSO) announced in late August that GDP had increased in the April-June quarter at an annual rate of 7.8%. The most euphoric cheerleaders predicted growth to accelerate to 8%. Even conservative forecasters routinely project GDP growth between 6% and 7%. This GDP-centric framing of alleged Indian economic success is wrong-headed. GDP is a flawed metric of national economic welfare. It hides inequalities and deflects attention from acute job scarcity, poor education and health, unlivable cities, a broken judicial system, and environmental damage. Feverish celebrations of India’s large but unequally distributed GDP hide the struggles of large numbers of people; large GDP is not purchasing power. For India, ‘fastest-growing’ growing GDP should be a trivial achievement. Just as a 10-year-old child gains height more rapidly than a 20-year-old adult, India as the poorest of the major economies should grow fastest. Embarrassingly, it has failed to consistently do so. In fact, contrary to the hype, GDP growth has slowed sharply over the past two decades. The problem has been weak mass demand. Pre-COVID and post-COVID Indian GDP grew at an annual 9% rate in the mid-2000s as historically high world trade growth lifted all economies. A financial sector-real estate-construction bubble added froth to that growth. This was unsustainable. Growth slowed to 6% after the global financial crisis of 2007-08 as world trade decelerated quickly. By 2012-13, GDP growth had fallen to about 4.5%, but growth for that year and the next three jumped courtesy of a mysterious data revision in January 2015. Cleverly juggled statistics, however, could help only so much. The slowdown resumed after the demonetisation and botched GST rollout. And once the finance-real estate bubble collapsed following the IL&FS bankruptcy in August 2018, GDP growth came down to 3.9% in the year before the pandemic. In fact, the pre-COVID growth was more dire than the publicised estimate implies. Indian statistical authorities present income from production as their measure of GDP. In principle, expenditure on Indian products (by national residents and foreigners) should equal income because producers earn incomes only when someone buys their wares. But expenditure grew at a mere 1.9% in the pre-COVID year. When income and expenditure growth differ significantly, an average of the two more fairly represents the state of the economy rather than any one measure. By that averaging method, GDP grew by 2.9% in the pandemic year. The slowdown from the heady 9% GDP growth in the mid-2000s to 3%-4% before the pandemic reflected severe weakness in demand. That weakness manifested in the glaring drop in private corporate fixed investment from a peak of 17% of GDP in 2007-8 to 11% in 2019-20. Private corporations cut back investments recognising that domestic consumers, fearful of job and earning prospects, had constrained purchasing power, and foreigners had only a limited appetite for Indian goods. In the post-COVID-19 years, the economy has bounced around. It fell sharply, recovered modestly, slowed severely, and experienced a dead cat bounce from late-2022. The only way to assess this bouncy post-COVID phase is by determining the average growth rate over the entire period. Even that is not straightforward. If we consider the latest four quarters over the four quarters before COVID, the annual growth rate (of the income and expenditure average) is 4.2%. If we compare only the latest quarter over the quarter before COVID, the annual growth is just above 2%. The tell-tale sign of post-COVID demand weakness is the further drop in private corporate investment to 10% of GDP in 2021-22; analysts believe that it has remained anaemic in 2022-23. Investors recognise that while rich Indians, helped by an overvalued rupee, are buying luxury goods, the majority can barely buy necessities. In response to shrinking mass affordability, producers continue offering ultra-low price staples such as noodles, toothpaste, soaps, soft drinks, and biscuits, but sell them in packages of ever-smaller quantities. In December 2022, the government instituted a year-long free grain programme for nearly three-fifths of the population; analysts expect the programme to persist through the 2024 general elections. Meanwhile, to maintain consumption, households have slashed their savings rates to 5.1% of GDP, from 11.9% in 2019-20. Those eligible for credit cards are racking up worrying levels of debt. And with an overvalued rupee and world trade barely crawling ahead, Indian exports have been falling. Need to bolster demand In the glow of a fake high-growth story, government policy has tried to rev-up supply rather than bolster demand through good jobs, more human capital investment, and functional cities. Unsurprisingly, the September 2019 corporate tax cut, sops like PLI schemes, and shiny flyovers and highways have failed to revive corporate investment. Increased fiscal reliance on indirect taxes, which erode purchasing power, has aggravated demand. A sober analysis of GDP growth just before and after COVID points to a medium-term annual GDP growth forecast of 3%-4%. Unfortunately, a domestic elite and international media narrative of “high growth” will continue, as will policies in opposition to India’s needs. And when narrative and reality clash repeatedly, tragedy follows.