Less than a week after the RBI dismissed downward growth forecasts for India by multinational institutions (“the IMF, in particular”), stating that such forecasts might “encounter forecast errors” with actual outcomes for FY24 “surprising them positively”, the Finance Ministry’s monthly economic report (MER) for March 2023 has contradicted it.

The MER says, there are “downside risks” to “our official forecast” (the RBI’s) of 6.5% of real GDP growth in FY24 due to two factors: (i) escalation in global economic uncertainty adversely impacting trade, oil prices (due to cut in oil production) and also capital inflows because of “risk aversion” in financial markets (bank runs and rising interest rates in the US and Europe) and (ii) setting in of El Nino conditions in June.

Earlier this month, the RBI kept the policy interest rate (repo) unchanged and raised the growth prospects from 6.4% to 6.5%. This was precisely the time when the IMF lowered India’s growth prospects from 6.2% to 5.9%, World Bank from 6.5% to 6.3% and Asian Development Bank from 6.8% to 6.4%. The RBI’s optimism was noteworthy given that the two factors the FinMin’s MER flags for the “downward risks” were already well known. Trade was slowing for three quarters of FY23, interest rates had gone up in the US and Europe just days earlier and crude price was rising rapidly due to cut in production; the El Nino risk has been in the news since January 2023 with India officially reporting warmest February in 2023 in 146 years.

The MER, however, supports the RBI’s assessment of “easing inflation”, without realising that the RBI’s inflation forecasts have regularly gone wrong. Besides, in its April 2023 bulletin, the RBI reported that the inflation forecast errors is a global phenomenon, including in India, since the pandemic and it is because of “overlapping supply and demand shocks”. So, the threat of under-estimation of inflation lingers on and at a projected 5.2% inflation in FY24 (by the RBI), it is higher than the mandated rate of 4% (with upper tolerance limit of 6%).

The MER’s assessment of India’s growth prospects in FY24 is rightly being called “realistic”. But this realistic assessment is a problem for several reasons. There are many domestic and more fundamental reasons to worry about India’s growth in FY24 and after.

These concerns can best be captured by the very growth numbers in seven key economic indicators that the FinMin and RBI routinely highlight to assure of robust growth – improving growth in central capex, bank credit outflows, auto sales and tax collections (reflecting higher income).

Here is how.  

Inversion in CPSUs’ capex push

The Centre’s capex has increased from 4.1% of the GDP in FY22 (RE) to 4.9% in FY24 (BE). But at 4.9% of the GDP, it is actually back to the FY20 level.

The capex share of CPSUs – which are supposed to bring efficiencies and outcomes often associated with corporate entities – in the total central government capex (combined CPSUs and central ministries/departments) has inverted.

In fact, it has fallen by half – from 3.2% of the GDP each in FY19 and FY20 to 1.5% in FY23 (RE) and 1.6% in FY24 (BE). This fall is because of gradual defunding of CPSUs through various means, including higher demand on their dividend and cash surplus pass-on to the Centre.

On the other hand, the capex share of central ministries/departments – which are normally considered wasteful and less efficient than the CPSUs – has doubled from 1.6% in FY19 to 2.7% in FY23 (RE) and 3.3% in FY24 (BE). There is yet another problem with this. The actual capex share of central ministries/departments is far less than the claim because it contains several revenue expenses, such as ₹1.45 lakh crore to the FCI, ₹30,000 crore of support to oil marketing PSUs for the losses they suffer due to rise in oil and LPG prices and also ₹1.30 lakh crore of loans to state governments (though this is meant for states’ capex).

Besides, one shouldn’t lose sight of the fact that the Centre’s capex is relatively a minor component.

One, it is far lower than that of state governments. The Centre’s average capex in the past 10 fiscals is 1.9% of the GDP, while that of state governments is 3.4% (Economic Survey 2022-23). Secondly, the general government capex (Centre plus states) is also very small compared to the total investment in the economy (gross fixed capital formation or GFCF).

The National Accounts Statistics show, the general government GFCF averages mere 3.6% of the GDP in the past 11 fiscals, while that of total GFCF averages over 29% of the GDP in the same period. The reasons? Bulk of investment (GFCF) comes from “household sector” – 40% of the total GFCF.

How do the latter fact – far bigger capex contributor is “household sector” – matter?

It matters because the household sector’s capex share is progressively falling from 46% of the total GFCF in FY12 to 40.5% in FY22. This is because the financial health of households is progressively weakening, as would be clear soon.

Why hype the capex push then? Finance Minister Nirmala Sitharaman said in her 2023 budget speech that apart from driving growth, it is meant to “crowd-in” private investments”. Private investment (private GFCF) has fallen from 11.9% of the GDP in FY16 to 10% in FY22 (up to which data is available) – despite corporate tax cut, continued tax concessions and PLIs, ease of administrative clearances and decriminalisation of corporate law violations etc.

Inversion in bank credit

The other claim is about higher credit growth.

True, bank credit to non-food sector grew by 15.4% in FY23 – as against 8.7% in FY22. But scrutiny of disaggregated data (available up to February 2023) reveals another inversion.

Instead of the industry and services sectors – which produce goods and services in the economy, generating higher venue and jobs – this credit growth is due to growth in ‘personal loans’ for consumption expenditure. The RBI data shows, ‘personal loans’ overtook ‘large industry’ in FY20, ‘industry’ and services in FY22. The trend continues in FY23 (up to February 2023). It had overtaken agriculture long back (at least since FY08 for which the RBI provides data).

If growth in credit outflows is considered for FY23, it is a mere 2.5% for ‘large industry’ but 18.7% for ‘personal loans’. Not long ago, ‘large industry’ accounted for 80% of credit to ‘industry’ and credit to ‘large industry’ is always considered more important because they anchor growth and generate better quality and better-paying jobs.

Inversion in tax collections

Same is the case with higher tax collections (reflecting higher income). There is a robust rise in direct and indirect tax collections in FY23. But here is the rub.

The financial health of households – which provides maximum capex to the economy as flagged earlier – is progressively weakening, thereby also increasing inequality as benefits of growth goes to the top.

The tax data for FY16 to FY21, released in February 2023, shows both pre-pandemic slowdown (demonetization and GST impact) and pandemic crisis disproportionately hurt the lowest income group (Rs 0-5 lakh), while sparing higher income groups and corporate entities.

The number of taxpayers in the lowest bracket (₹0-5 lakh) fell in three out of the six fiscals – progressively by -1.6 lakh in FY17, -35.5 lakh in FY20 and -51.7 lakh in FY21. There can’t be worst sign for sharply rising poverty.

Inversion in auto sales

Auto sales have recovered too. Total auto sale (cars, two-wheelers, three-wheelers etc.) recovered from multi-year low of 176 lakh units in FY22 to 212 lakh units in FY23. This, however, remains far lower than 262.7 lakh units sold in FY19.

But more importantly, this growth in FY23 hides growing inequality. This is what RC Bhargava, chairman of the Maruti Suzuki India, has repeatedly raised. On April 26, 2023, he said: “The country has to become a little bit more wealthy for people to be able to afford these (small) cars”, he said. He had first raise this in October 2022, saying that people’s ability to buy small cars had eroded and would continue to decline next year.

The wholesale data provided by the Society of Indian Automobile Manufacturers (SIAM) proves it.

One, it shows, the sale of high-end cars (SUVs and luxury cars) surpassed that of entry level cars by 22,180 units in FY22 – which increased by 2.6 lakh units in FY23.

Two, two-wheeler sales – indicator of financial health of poorer households in rural, semi urban and urban areas – increased to 158.6 lakh units in FY23, from 135.7 lakh in FY22. But it is far below 262.7 lakh units sold in FY19.

Total auto sales and two-wheeler sales indicate that poorer households can’t afford what they could in FY19 (up to which data is available). Add the population of 18 year olds added to the population and the automobiles they could have bought and the true magnitude of the backsliding of the economy – at least for the poorer households – would be clear.

Inversion in housing, mobiles and FMCG

The same pattern is seen in several other sectors – pointing to growth benefiting those at the top and bypassing those who constitute the majority.

Housing: Housing sector is booming (23% up in first three months of 2023, compared to corresponding period of 2022) but like car sales, there is an inversion here too. As per Anarock Research, the share of affordable house sales, priced below ₹40 lakh, has halved from 40% in 2018 to 20% in 2022.  In the first three months of 2023, their market share (in sales) in seven top cities slipped to 18%, while that of mid-segment houses, priced at ₹40 lakh-₹1.5 crore, dominated with 36% and that of luxury houses, priced at ₹80 lakh-₹1.5 crore, came second with 25% – as per the latest CII-Anarock report.  Naturally, the focus has shifted to building more mid-segment and luxury houses.

Smartphones: Counterpoint Research says even as India’s smartphone shipments have declined, the premium segment is seeing robust growth – with its share almost doubling in the first three months of 2023, compared to that of 2022. 

FMCG goods:  Biggest FMCG company Hindustan Unilever’s sales are up 10% in the first three months of 2023 (Q4 of FY22), but in rural areas and lower income groups, demand continues to be sluggish with -7% fall in sales for FY23.  The rural areas are home to about 70% of India’s population.

The conclusions that can be drawn from the seven points made so far are clear: (a) hype over growth indicators without reading the fine prints – elephants in the room – is misleading and would lead to wrong estimations for future growth (b) the real remedial measures would continue to elude policymakers – as is the case for the past many years. The choice is not really between positive growth indicators but attention to details and preparing plans, strategies to improve the economic fundamentals.  

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