The FinMin is gung-ho about “strong growth” in FY24 “as projected” by the RBI (6.5%) “amid a global slowdown” in its latest monthly report (MER) released on November 21, 2023. It argues that “solid” domestic demand, which is “the strongest driver of India’s growth so far in FY24”; “declining” unemployment; “sustained investment push” by the government “imparting an impetus to private investment”; “healthy” corporate profits; “accumulated savings”; “reduction” in non-performing loans; “strong” services exports, etc. would lead to 6.5% growth.

To begin with, what is left unsaid is that even at 6.5%, the FY24 growth would be significantly less than 9.1% in FY22 and 7.2% in FY23 – indicating loss of growth momentum. Secondly, the MER comes days ahead the Q2 data for FY24 is to be released (November 30) – and hence, a bit premature when global growth is slowing down (which the MER acknowledges). But more significantly, it comes two days after Union Ministers Gajendra Singh Shekhawat and G Kishan Reddy, Maharashtra Deputy Chief Minister Devendra Fernandes and business tycoon Gautam Adani hailed the Indian economy and the Prime Minister, on November 19, 2023, for breaking into $4 trillion mark.

Interestingly, the budget’s (nominal) GDP projection for FY24 is $3.6 trillion (@83 per dollar) and in Q1 of FY24, it was mere $0.85 trillion. The claim of $4 trillion economy, as on November 19, 2023, was attributed to the IMF. But the MER is silent on it.

More importantly, the growth seems to be slipping.

Flight of capital, capitalists and labour/citizens

Investment is critical to growth. What does the latest FDI inflows data show?

It shows a sharp fall in both total FDI (-16%) and equity FDI (-20%) inflows (in USD) in FY23. It also shows a sharp fall in equity FDI inflows (-31%) in H1 of FY24 vis-à-vis the corresponding period of FY23 (no comparative data available for total FDI inflows in H1 of FY24). This is an indication that global funds are going elsewhere since FY23 – either due to higher interest rates in the US and Europe and/or better investment environment elsewhere, like Canada, Australia, Brazil, Mexico, Vietnam etc.

The FDI outflows are falling in FY24 – by $20 billion during April-October 2023 (FY24) vis-a-vis the corresponding period of FY23. How does this matter? Since about 85% of India’s FDI inflows and outflows are through opaque tax havens and shell companies – indicating high probability of round-tripping of funds – a fall in FDI outflows may mean a further fall in FDI inflows.

Hot money (FII) or FII inflows have increased in FY24 (up to November 21, 2023) – after two years of net pullout. This money goes to stock markets, which are booming, but since stock market boom is disconnected with the real economy and FIIs may leave overnight, without warning (hence called ‘hot money’), this rise is not a good indicator of long-term investment or growth. FDI inflows, in contrast, are long-term investments.

Outward remittances (LRS) are consistently going up too – from $12.7 billion in FY21 to $19.6 billion in FY22, $27 billion in FY23 and $18 billion in H1 of FY24. This spike can’t be attributed to 20% tax on such remittances (beyond Rs 7 lakh) – which was to come into effect from October 1, 2023. Though the remittances are mainly on account of travel, education and maintenance of relatives settled abroad, a significant amount also goes into foreign deposits, gifts, equity investments and buying properties – 21.5% of the entire outward remittances in H1 of FY24.

LRS outflows should worry and could be counted as the flight of capital (along with capitalists and labour) because more and more Indians are also fleeing to foreign shores for (a) studies (25% of all students landing in the US in the 2022-23 academic year) and (b) in search of better life.

The latter category includes (i) those seeking citizenship abroad – their numbers rising from 1,22,819 in 2011 to 1,31,405 in 2015 to 2,25,620 in 2022 and 87,026 till June 2023 (halfway mark for the calendar year), as the Lok Sabha was told in July 2023. Such citizenships often involve investment in and flight of assets to those countries (“citizenship-by-investment” programmes). Besides, some of them are fugitives, like Mehul Chokshi and Sandesara brothers, who have decamped with bank loans. There is a sharp spike in banking frauds and willful defaults in and after 2018.

Those leaving India for better life also include (ii) thousands of Indians illegally migrating, despite facing death and hardships. In less than a year between November 2022 and September 2023, 97,917 Indians were arrested by the US authorities alone for illegally entry, a five-fold rise since 2019 – of which about 45,000 said this was due to the “fear in their own country” and the 730 arrested were unaccompanied minors.

The effect of this outflow of capital, capitalists and labour points to loss of faith in growth and better economic prospects in India.

Meanwhile, inward remittances grew by 24% in 2022 to reach $111 billion but as the World Bank report of June 2023 says, this growth is expected to fall to 0.2% in 2023 “due to slowing economic growth in major source countries”. This means, less funds for domestic economy in FY24.

The net effect of all the above is a pessimistic outlook for FY24.

Feeble growth drivers and worsening household finances

Those familiar with GDP data know that India is a single engine-driven economy for several years. It is the government investment/expenditure (PFCE) which is providing the real impetus. Other three engines – demand (PFCE), private capex (private GFCF) and net exports – are merely pulling along.

Government expenditure (GFCE) has grown but consider four facts: (i) GFCE averages just 10% of the GDP (FY12-FY23) with a declining trend – from 11.1% in FY12 to 9.9% in FY23 and 10.1% in Q1 of FY24 (ii) during FY13-FY23 its growth averages 4.6% – lower than the GDP growth rate of 5.7% during the same period (iii) in Q1 of FY24, its growth fell to minus (-) 0.7% and (iv) government capex (public GFCF) is stagnant at about 7% of the GDP for the past 11 fiscals up to FY22 (up to which data is available). The Controller General of Accounts (CGA) data shows, the Centre’s expenditure is 49% of the budgeted expenditure in H1 of FY24.

How much impetus can such a GFCE provide?

Second engine (not in any particular order) is private capex (private GFCF) which collapsed during the Great Recession of 2007-09 and is yet to rev up – falling from 16.8% of the GDP in FY08 to 10% in FY22, the last fiscal for which data is available. Considering the RBI data on “envisaged” private investment as proxy for private GFCF in FY23 and Q1 of FY24, the trend remains downward – as Fortune India article ‘Is private investment in the economy on revival path?’ had demonstrated.

Further, the latest RBI data shows, net financial assets of households touched 47-year low of 5.1% of the GDP in FY23. The MoSPI’s data on net household savings (financial and physical assets) shows a fall from 23.6% of the GDP in FY12 to 19.7% in FY22 (last fiscal for which data is available) and household savings as percentage of GFCF (capex) has fallen from 45.9% (constant prices) to 40% during the same period.

Sure, unemployment rate is declining but the same PLFS reports also show this is accompanied with a fall in good quality jobs (regular wage/salaried), shift of work from high-productive and high-income manufacturing to low-productive, low-income agriculture and unpaid self-employment, a fall in social security cover and negative wage growth (except for ‘casual’ category). Inflation has also been high in the past two years.  

All this means, household incomes would worsen and going forward, availability of household savings for capex (GFCF) would fall further. It is probably this distressing development that led the FinMin to talk of “accumulated savings” – meaning bank deposits – but unbeknown to it, banks and NBFCs are facing (a) fresh financial risks due to rise in “unsecured” consumption loans and (b) a large amount of bank deposits have been wiped out (i) in writing-off NPAs, recapitalising banks since FY15 (ii) rescuing and recapitalising collapsed bank (Yes Bank) and NBFC (IL&FS) and (iii) massive loss of credits as collapsed banks and NBFCs (PMC, HDIL and DHFL) went into bankruptcy after 2018.

Third engine, consumption or demand (PFCE), about which the FinMin says it is “solid” and “the strongest driver of India’s growth so far in FY24”, needs a detailed scrutiny.

Debt-fueled consumption, fall in good jobs and wages

The FinMin’s reliance on high demand is based on high-frequency data, like sale of passenger vehicles (PVs) and houses, bank credit outflows, air travel, credit card transactions etc. and “a surge in consumer spending during the ongoing festive season”. These data hide more than they reveal:

  • High-frequency data is limited to formal economy, not informal economy which constitutes about 50% of the total economy and which has received shocks other than the pandemic –demonetisation of 2016 (informal economy is cash-driven) and GST of 2017 (its input tax credit shifting business from informal to formal). No data/survey has been carried out to measure the impact and so apportioning of formal sector data to informal sector would overestimate GDP growth.

  • Rise in sales of PVs and housing are due to sharp rise in high-end luxury products but fall in low-end products (affordable to larger population) – pointing to sharp income inequality which makes growth unsustainable. The SIAM data shows, sale of entry-level cars (PCs) began falling behind high-end cars (UVs) in FY22 and continues until now – the April-October 2023 (FY24) sales of UVs at 13.85 lakh units outstripped that of 9.4 lakh units of PCs. Knight Frank report shows, sale of luxury houses of Rs 50 lakh-Rs 1 crore and above Rs 1 crore accounted for 36% and 35%, respectively, in Q2 of FY24 – far higher than affordable houses of below Rs 50 lakh at 29% of FY24 – across big cities.

  • Air travel (relatively better offs) is up but it is well known since 2021 that only 1% Indians account for 45% of flights (frequent fliers). Meanwhile, rail travel (relatively poor) in FY23 (4,183.6 million) is less than 50% of the pandemic FY19.

  • Number of passengers travelling by rail (poorer segment) in FY23 (up to February 2023) at 5,864.39 million was substantially less than 8,439 million in the pre-pandemic FY19 (it was 3,519 million in FY22). This points to K-shaped economy and economic distress of the masses – not a good sign for sustaining high growth.

  • Income of most Indians remains precarious is also reflected in “free” ration to 67% households – started in April 2020 and would continue till the end of 2029.

Bank credit outflow data reveals distressing news:

Growth in bank credit is led by personal loans for consumption and NBFCs – up at 31.9% and 9.4% of the non-food offtakes, respectively, at the end of September 2023. NBFCs are giving more personal loans – up at 31.2% by the end of March 2023. Both banks and NBFCs are giving large amounts of “unsecured” loans too, forcing the RBI to raise capital to risk-weighted asset ratio (CRAR) of both banks and NBFCs to 125% (back to 2019 level) on November 16, 2023. Even after that, the RBI Governor is warning banks and NBFCs against “all forms of exuberance” and ensuring that lending to all categories is “sustainable”. The Finance Minister is advising NBFCs to rein in their enthusiasm in disbursing unsecured loans.

Meanwhile, in Q1 of FY24, PFCE fell to 57.3% of the GDP – from 58.8% in FY23 and 58.3% in FY22. Its growth is not very inspiring. During FY13-FY23, it averaged 6.1% growth – barely above the GDP growth of 5.7% – and fell to 6% in Q1 of FY24. Other indicators of demand – growth in industrial production (IIP), PMI and FMCG sale – are sluggish, particularly in Q2 of FY24.

The fourth engine, net exports (trade balance), has always been in the negative territory – except only twice in post-independent history, in 1972-73 and 1976-77. During FY12-FY23, it ranged between -1.1% and -6.5%; in Q1 of FY24, it was -6.4%. So, this is actually a drag on growth. That leaves “strong” services exports – which has helped in reducing trade deficit but as yet not good enough to reverse the trend, particularly when merchandise imports keep rising.

Ironically, the Centre has played little role in boosting services exports, the Foreign Trade Policy (FTP) of 2023) is silent on how to push it and tax incentives are concentrated on manufacturing and merchandise exports. Worse, it is even hurting future services exports by tilting the balance away from English education (key to IT development and IT services exports) to vernacular languages in universities and undermining primacy of English in senior level employments (UPSC exams) – as Fortune India article ‘Future of trade in services exports’ explained earlier.

Now, the sudden ban and crackdown on production, storage and sale of ‘halal’ products – which go beyond meat to include edible oil, mint, rice and bakery items – by the Uttar Pradesh government is bound to impact (merchandise) exports of these items – until at least the state government sets its own standards, opens and operationalises its certification centres for these products. Going by the contemporary history, the ban and crackdown may also travel to other states to the detriment of merchandise exports.

Are demand and corporate profits pushing growth?

The FinMin’s argument of “healthy” corporate profits for “strong” growth is misplaced too.

In the pandemic fiscals of FY21, corporate profits touched historic high but (a) the GDP growth collapsed (b) corporate tax hit a historic low (below income tax collection) and (c) there was massive loss of jobs and wage cut in the corporate world. A 2022 analysis showed, the “stellar rise” in corporate profits in FY21 and FY22 didn’t lead to corresponding boom in capex, with listed companies’ investment in fixed assets rising by only 2.3% (year-on-year) in FY22 – the slowest in the previous six years! Even the corporate tax cut of 2019 didn’t lead to fresh investments – as the RBI had pointed out.

Another analysis of November 2023 shows a slowdown in corporate revenue (sales) growth in the past one year has slowed down their capex (combined fixed assets of listed companies) in H1 of FY24 – while profits went up by 12% (H1 of FY24). This fall-in-revenue (sales)-but-rise-in-profit is a widespread phenomenon – in India and in the US and Europe – and goes by the sobriquets “sellers’ inflation” or “greedflation”. Yet another analysis shows, the profits of Adani group (nine listed companies) profits doubled (107.7%) in H1 of FY24 even as its sales dipped by 14% during the same period.

Thus, to argue that “healthy” corporate profit will lead to “strong” economic growth is unconvincing. So is the case with the argument that “reduction” in non-performing loans would lead to strong growth.

To sum up, what will drive “strong” growth in FY24 remains unclear.

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