While the government and many economists are gung-ho about the economic recovery in FY22, they seem to ignore that India was on a prolonged slowdown before the pandemic hit, with the real GDP growth falling to 4% in FY20 from a high of 8.3% in FY17. The pandemic accentuated it further and plunged the real growth rate to minus (-) 7.3% in FY21. So, when the economy recovers at the end of FY22 – V-shaped or K-shaped – it is more about going back to the pre-pandemic level of 4%. The Q2 numbers for FY22 released Tuesday indicate that.
While it is a welcome development, it does not mean that India is back to its high growth phase. The average annual GDP growth was 7% during the previous 15 years between FY05 and FY19 (2011-12 series at constant prices) before the pandemic hit. At least, it is not getting there any time soon. Regaining the pre-pandemic level in absolute GDP numbers may be the first step but a lot needs to change before India is back to 7% growth.
A 9.5% real GDP growth for FY22 (RBI estimate) is a mathematical mirage, coming as it does from a low base of -7.3% in FY21. In absolute numbers, 9.5% growth translates to Rs 147.9 lakh crore of the GDP in FY22 (constant prices), which works out to be just 1.6% over FY20. The hype over V-shaped recovery to the FY20 level reflects low expectations in India’s growth story. Not long ago, during the much-maligned Congress-led UPA regime (FY04 to FY14), India was talking about double-digit growth. Instead, there is another hype, of making India a $5 trillion economy by 2025.
Assuming India achieves 9.5% growth in FY22, the real GDP size (at constant prices) would be Rs 148 lakh crore or $2 trillion (at exchange rate of Rs 74) – substantially less than $2.7 trillion in FY19. A part of the problem (shrinking in the GDP size in dollar terms) is also because of the falling rupee value against the USD. There is no knowing how many years it would take the economy to more than double to $5 trillion.
Predictably, the hype over $5 trillion economy skirts the most important question: How will it be achieved? In India’s growth prospects anything but bright and India's economic rebound ineffective without 'inclusion' – I have focused on two indicators of growth: (a) credit outflow to non-food sector, which is being driven and sustained not by high-productive and high-income industry and services but by low-productive and low-income agriculture and non-productive personal loans (for consumption purposes) and (b) household financial health (physical and financial assets), which has considerably weakened in the past two decades impacting consumption demand in the economy.
There is yet another growth indicator: savings and investment rates.
Here too, the trend is similar – a prolonged downward swing. The following graph maps gross domestic savings, gross capital formation (GCF or investment) and gross fixed capital formation (GFCF or capital investment) as percentage of GDP to capture this slowdown post-FY11.
While gross saving and capital formation (GCF) data is not available for FY21, GFCF or capital investment declined, indicating that the other two would also likely to show a downward slope. Unless saving and investment rates reach their previous levels during FY08 and FY13, the GDP growth is unlikely to reach 7% growth level.
Undoubtedly, India is passing through a structural slowdown, not a cyclical one as the government and the economists on its roll would like people to believe. Unless the structural challenges are acknowledged, identified and addressed the long-term trends are unlikely to reverse on their own.
Household savings have been a major source of capital formation (investment) in India, which in turn depends on the level of household incomes. The demonetisation, a deeply flawed GST and the untimely lockdown caused massive loss of jobs and businesses, particularly small businesses, overnight and repeatedly. These developments have impoverished millions. Unless income of a large population improves, consumption demand is unlikely to be big enough to drive fresh investment.
The following graph maps consumption (Private Final Consumption Expenditure or PFCE) at constant prices – the main driver of GDP growth – to show how it fell even below the FY19 level in FY21.
No wonder despite excess supply of cheap credit, the credit flow for producing goods and services (industry and services sectors) remains sluggish and most of it gets parked in the RBI’s reverse repo account. In early 2021, the RBI warned that a prolonged cheap credit regime posed macro-financial risks to the economy and would slow down recovery and yet it continues to do so, as it admitted in its October 2021 bulletin.
The government had also cut corporate tax by Rs 1.45 lakh crore in September 2019 to spur private sector investment, which ended up doing nothing of the short. Instead, the RBI said in its annual report of 2019-20: “The corporate tax cut of September 2019 has been utilised in debt servicing, build-up of cash balances and other current assets rather than restarting the capex cycle.”
In its latest monthly economic review (MER) of October 2021, the finance ministry takes note of the higher economic activity to declare that “the stage is set for India’s investment cycle to kickstart and catalyse its recovery towards becoming the fastest growing economy in the world!”.
Such sentiments have been expressed for many years and is specifically meant to convey revival of private sector investment – which has been a major concern. While the MER takes into account various high-frequency economic data to express such optimism, it ignores the obvious one: private sector investment rate over the years. In its Financial Stability Report (FSR) of January 11, 2021, the RBI had listed “lack of robust private sector investment” as the number one risk to India’s economic recovery. Earlier, in its bulletin of March 2019, the RBI had also shown a sharp fall in private corporate investment after FY16.
The latest data shows that the trend continued till FY20. The following graph maps private corporate sector investment rates during FY12-FY20. It fell from 13% or more (of the GDP) during FY12-FY16 to 11-12% thereafter. The data for FY21 is not yet out.
India’s response to the slowdown has so far been focused on the supply side solution (cheap credit), largely ignoring the demand side solution (direct cash transfers to poor and SMEs) to revive growth. What the policymakers often forget is that the economy is not just about the growth of the top 10% or top 1% in the economic pyramid but also about the rest 90% or 99%. Without the income of the rest 90% or 99% improving, the wait for investment cycle to kickstart is wishful thinking.