Two challenges confront India’s march to become the world’s third-largest economy: sovereign debt and income inequality. Both make growth unsustainable and a curse for the average Indian (explained later). Centre has a bigger responsibility than states to go for a course correction to realise the promised ‘Amrit Kaal’ by 2047 – when India becomes developed and prosperous.
The distinction must be made clear first.
5th largest GDP, 159th in per capita income
There is a big difference between a bigger economy and a developed and prosperous nation. Here is one example to make it clear.
The World Bank data shows, as of December 18, 2023, India ranked 5th in GDP size at $3.4 trillion (current USD) but India also ranked 159th (of 209 countries) with an average per capita GDP (average income level) of $2,411 – below the average for “lower middle income” countries ($2,561.5) to which it belongs and also the global average ($12,744). The average Indian’s income is just 19% of the global average.
What was the income level of the Big 4 economies on December 18, 2023?
The US at $76,330, China at $12,720, Japan at $33,824 and Germany at $48,718 were far ahead of India (per capita GDP). The UK, which India replaced as the fifth largest economy, had an average income of $46,125. Even Bangladesh was ahead of India at $2,688.
In PPP terms, which is considered a better income comparison, India’s $8,400 was still below the average for “lower middle income” ($8,430.5) and the global average ($20,693) – in current international USD.
That is how poor an average Indian is.
What would be her income when ‘Amrit Kaal’ is reached in 2047?
Assuming that India continues to grow at 6% until 2047 (averaging 5.8% in the past 10 fiscals of FY15-FY24, taking 7% for FY24), the GDP size would double every 12 years (compound growth). That is, by 2047, the GDP and per capita GDP would be four times as bigger. Thus, in 2047, the average Indian’s income would be $9,644 (4 times $2,411). Another assumption here is that the population remains constant.
This ($9,644) is less than the current level of per capita income of China ($12,720), developed or high-income nations ($49,557) and the OECD, a mix of developed and developing nations ($43,431).
In short, India would continue to be a “lower middle income” country even in 2047.
This is what former RBI Governor Raghuram Rajan was trying to drive home during his recent India visit (to promote his co-authored book “Breaking the Mould”) while arguing for higher growth and course correction – without which India would see its demographic dividend disappear.
Rajan was charitable. Here is why.
Centre’s debt jumps three times
The Centre’s debt has grown at double the rate of GDP growth (averaging 5.8%) in the past 10 fiscals (FY15-FY24).
From ₹56.7 lakh crore at the end of FY14, its total liability (debt) grew to nearly three times to ₹152.2 lakh crore in FY23 (BE). The average growth in debt was 11.6%. In terms of GDP, this was up from 50.5% in FY14 to 59% in FY23 (BE), as per the Economic Survey of 2022-23.
But the actual for FY23 will be much more. One example: Food and fertiliser subsidies went up sharply – from the budgeted ₹3.2 lakh crore to ₹5.2 lakh crore in the revised estimate (RE).
The saving grace is that foreign borrowing remains low, at 1.8% of the GDP in FY23 (BE) – up from 1.6% in FY14.
The IMF’s recent warning about general government (Centre and states) debt rising up to catch up with the GDP size (100% of the GDP) in the medium-term is largely due to the Centre’s borrowings – up from 50.5% in FY14 to 59% in FY23 (BE) – 19 percentage points higher than 40% fixed by the FRBM amendment in 2018.
In contrast, states’ debt was 27.5% in FY23 (RE) – higher by 7.5 percentage points over the 20% limit (FRBM). The two together take the general government debt to over 86%.
But in FY24, the actual debt would be far higher because the Centre has declared many off-budget electoral freebies in 2023 – extension to “free” subsidy from January 1, 2024, LPG cylinders priced down to ₹450-500 from R 1,100, ‘Bharat Atta’, PM Janjati Adivasi Nyaya Maha Abhiyan (PM- JANMAN), urea and non-urea fertiliser subsidies etc. (“2024 Ahoy! Will electoral freebies throw fiscal deficit into disarray?”). There could be more as the 2024 general elections approach.
How are these relevant to growth?
As subsidies go up, there would either be a cut in government capex to meet the fiscal deficit target (budgeted at 5.9% for FY24) or go for even higher borrowing. Both will have an adverse impact on growth. The IMF says: “For India, above 66% of GDP is estimated to have a detrimental effect on growth.”
Higher debt means an interest payment burden. For the Centre, it is up from 3.3% of the GDP in FY14 to 3.6% in FY23 (BE). In the 2023 budget, interest payment for FY24 was budgeted at 20% of the total expenditure – the largest component.
The Centre may have dismissed the IMF’s warning about the rising debt but it came after considering the Centre’s explanations – (a) most of the debt is domestic and (b) general government debt is going down (from 81% in FY06 to 84% in FY22 but back to 81% in FY23).
The argument that the Centre’s higher debt is due to the pandemic crisis is true but only partly.
Data shows average growth in its debt was 10.3% before the pandemic (FY15-FY20) – hitting 12.5% in FY20. It went up by 18.2% in FY21 and came down to 12% in FY23.
Clearly, the pandemic wasn’t the only cause. What are the others?
Several policy decisions caused fiscal constraints: spike in corporate loan defaults (NPAs) write-offs since FY15 and a spurt in bank frauds and willful defaults (in and after 2018) that led to recapitalisation of banks and bailouts of banks and NBFCs; corporate tax cut of 2019 and PLIs, DLIs and other tax incentives since then to boost manufacturing and merchandise exports which depleted tax kitty; twin shocks (demonetisation and GST) hurting tax collections and a spike in welfare schemes (including “free” ration) even before the pandemic (cash transfers such as PM-Kisan and LPG subsidy).
The gains from all the above are not known (no study or assessment by the Centre). But all these put an additional tax burden on the poor (hence, a curse as mentioned at the beginning): (i) rise in GST collections (5% GST on food items, earlier exempted and cut down 28% GST on luxury goods) (ii) oil tax (benefits of cheap Russian oil didn’t go to retail consumers but corporations made windfall gains) and (iii) peak rate of 30% tax on personal income over ₹15 lakh but peak rate for corporations cut from 32% to 22% for old ones and from18% to 15% for new manufacturing units).
Net impact: While GDP grows, the average Indian is left behind.
Per capita GDP growth is lower than GDP growth
Income inequality is also known to damage growth prospects in the long run. Global studies have demonstrated that India stands out as a country “among the most unequal countries in the world” and the rise in inequality in India “has no precedent in recent history”.
While the GDP has been growing at 5.8% (average) during FY15-FY24, per capita GDP growth is 4.5% (average) during FY15-FY23 – 1.3 percentage points less every year. What it means is, growth is K-shaped or unequal.
As the World Inequality Report of 2022 (and Chancel and Piketty) showed, there has been a sharp and consistent rise in the income share of the top 1% and top 10% – along with a sharp fall in that of the middle 40% and the bottom 50% – after 1991.
Taken together, this means while the GDP may jump four times in size by 2047, that of per capita GDP would be substantially lower (cumulative impact of 1.3 percentage points over the next 24 years). This would also mean the average income of Indians may not be $9,644 by 2047 (not quadruple) – but less. India’s per capita GDP may then be further down than 159th and Indians poorer than now (2023).
But none of it needs to be necessarily so. Debt can be managed (better used) and so is inequality – provided the Centre makes a course correction.
Where is the Centre headed?
History offers plenty of solutions to reduce inequality – in the global and Indian contexts.
India brought down inequality during the much-maligned Nehruvian socialism (1950s to mid-1980s), but it went up after reforms and liberalisation starting in the mid-1980s (Chancel and Piketty). That era also saw unprecedented growth – a quantum leap from 0.8-0.9% in the pre-independence era to 4.1%, which is 4.6 to 5.1 times. India never achieved that rate of growth either – highest average growth of 6.8% during the decade of FY05-FY14 was mere 1.1 times of 6.1% during the previous decade of 1994-95 and 1.4 times of 5% during the earlier decade of 1984-85 and 1993-94 (all in 2011-12 GDP series).
For CEA Anantha Nageswaran then argues to prioritise growth over addressing inequality by stating (in the essay of December 2023, “Perspectives on the Inequality Debate in India”) that “the Indian experience has been that of convergence between growth and inequality rather than of conflict” raises serious questions.
This is not merely a repetition of what the Economic Survey of 2020-21 had said (“given India’s stage of development, India must continue to focus on economic growth to lift the poor out of poverty by expanding the overall pie”) but also an argument for continuation of the same growth model. This very model undid the gains of equitable growth of the Nehruvian era (earlier reforms and liberalisation) and further pushed the K-shaped growth after 2014 (twin shocks of demonetisation and GST hurting the informal economy, pandemic-time reforms promoting private businesses and ‘national champions’ model).
The CEA acknowledged the data vacuum in his essay but didn’t explain why it exists or what is being done to address it.
India doesn’t have income or household expenditure (MPCE). The last one was from 2011-12 (more than a decade old). There is no sign of Census 2021 yet. Together, MPCE and Census 2021 could have helped assess income and income inequality. A whole lot of datasets are either missing or outdated, making the GDP estimation and household income inaccurate: No sign of the 7th Economic Census which was completed in 2021 and no update of Unincorporated Enterprises (non-farm) survey after 2015-16, IIP after 2011-12, CPI and WPI after 2012, Input-Output table after 2008-09, Tendulkar poverty line after 2004-05, Unorganised Sector Statistics report after 2012.
Hence, the argument of CEA and the Economic Survey of 2020-21 lacks substance (data and evidence) and seeks to confuse rather than enlighten.
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