The RBI’s January bulletin makes surprising claims about the state of the economy: “The Indian economy recorded stronger than expected growth in 2023-24, underpinned by a shift from consumption to investment. The government’s thrust on capex is starting to crowd in private investment.”
These claims are primarily based on the first advanced estimates (AE1) for FY24, released by the MoSPI earlier this month[2], which show growth in consumption (PFCE) is falling to 4.4% in FY24, from 7.5% in FY23 and its GDP share to 56.9%, from 58.5%. The RBI completely misses the point that this 4.4% PFCE growth is the lowest in 21 years (after FY03 when it was 2.9%), except the pandemic FY21 when it fell to -5.2%.
On the investment front, it is mixed. Growth in government expenditure (GFCE) is up by 4.1% from a low base of 0.1% growth in FY23, but its GDP share is down to 9.6%, from 9.9% in FY23. Growth in capex (GFCF) is down to 10.3%, from 11.4% in FY23, but its GDP share is up to 34.9%, from 34% in FY23. When GFCE and GFCF are combined (as investments) their growth is up by 8% and their GDP share is up to 44.5% – from 43.8% in FY23.
Going by the RBI’s yardstick of considering GDP share as the driving power of growth (as in the January bulletin), the GDP share of PFCE is down and that of combined GFCE and GFCF is up and hence, a “shift” may be surmised. But before doing that, here are four caveats:
(i) FY24 (AE1) is a statistical extrapolation of Q1 and Q2 data.
(ii) Q1 and Q2 data are based on formal sector indicators, which largely ignore the informal sector contributing 50% to the GDP and 90% to employment.
(iii) GDP deflator (for inflation-indexing) used for FY24 (AE1) is very low at 1.6% (nominal growth of 8.9% minus real growth of 7.3%) – when headline inflation (CPI) is 5.8% during April-December 2023 and the RBI’s own estimate for FY24 is 5.4% (stated on December 8, 2023).
(iv) RBI’s growth estimate for FY24 is 7% while the MoSPI’s is 7.3% – while both have access to the same set of formal sector indicators.
The prudent way to assess a “shift” is long or medium-term trends, not two-quarters of formal sector data.
Downward trend in both demand and investment
In a decadal comparison, the trend in PFCE remains unchanged – a slowdown in its growth and GDP share. PFCE’s average growth is 5.9% in the current decade of FY15-FY24 – against 6.1% in the previous decade of FY05-FY14 – and its GDP share averages 56.8% now against 56.9% earlier (the 2011-12 series, constant prices).
But if the 2004-05 series (constant prices) data is considered for the previous decade, the PFCE’s growth and GDP share were far higher at 7.4% and 63.9%, respectively. This means, the 2011-12 series data doesn’t support the RBI’s claim but the 2004-05 series data (which the RBI doesn’t mention) does.
In the shorter time span, the PFCE’s GDP share of 56.8% in the pre-pandemic FY20 is almost the same as 56.9% in FY24 (AE1) but the interim years saw a secular surge in the PFCE from 57.2% in FY21 to 58.3% in FY22 and to 58.5% in FY23. This means demand in the economy is still affected by the prolonged K-shaped growth and (post-pandemic) recovery. There is plenty of corroborative evidence of this:
· Household financial assets have fallen to a 47-year low of 5.1% of the GDP in FY23, while their debts have risen to 5.8% of the GDP in FY23 – only twice in 53 years it went above 5%, in FY06 (5.1%) and FY07 (6.6%).
· ITRs declaring taxable income have fallen 54% in seven years between FY16 and FY23.
· Tax burdens shift from the rich (corporate tax cut, manufacturing incentives like PLIs and DLIs, cut in GST on luxury items etc.) to the poor through indirect taxes (elevated oil taxes when crude price is low for years, 5% GST on food items consumed by the poor). As a result, in the past five fiscals (FY19-FY23), income tax collection has risen by 76% but corporate tax by only 24.5% and direct tax buoyancy has fallen to 1.18 in FY23 from 2.52 in FY22 (IT data released on January 23, 2024).
· “Free” ration is being given to 67% of households and India’s rank slips in the Global Hunger Index – from 80 in 2015 (of 104 countries) to 111th in 2023 (of 125 countries).
· Low-paying informal agriculture employs 48.9% of total workers and 18.3% of the total workforce are unpaid or “helper in household enterprise” (PLFS 2022-23).
· 55 million rural households were engaged in low-paying (below statutory minimum wages) menial MGNREGS jobs until January 20, 2024 (FY24). Going by the 2011 Census data of households, they constitute 33% of total rural households.
· 'Real’ rural wages contracted in 21 of 23 months up to October 2023 (reflecting rural distress where 70% population reside). This contraction (negative growth) follows a deceleration since 2014.
· Loss of jobs in major IT companies (20,000 sacked from 85 firms in January 2024 alone) and start-ups.
· Thousands of youths are lining up in Uttar Pradesh, after Haryana, for construction jobs in Israel – undeterred by the war and the Indian government’s refusal to provide any protection or security to those aspirants despairing for work. Meanwhile, engineers, and postgraduates in maths and anthropology have joined the Delhi Zoo as keepers.
What about investments?
Government expenditure (GFCE): Its growth averages 5.4% now, against 7.3% in the previous decade. Its GDP share averages 10%, against a higher 10.4% in the previous decade (2011-12 series). In the 2004-05 series, GFCE grew at 7.3% (unchanged) but its GDP share was much higher at 11.8% and hence, as a driver of growth, GFCE has weakened.
Overall capex (GFCF): Average growth is 6.7% and its GDP share is 32% in the current decade – against 9% (higher) and 31% (lower), respectively, in the previous decade (2011-12 series). In the 2004-05 series, these numbers were 7.3% and 35.2% (far higher in both), respectively. Going by the 2011-12 numbers, GFCF’s share has gone up but fallen by the 2004-05 numbers.
Public sector GFCF: Its GDP share averages 6.9% during eight fiscals of FY15-FY22 (up to which data is available). In the previous decade, it averaged higher at 7.6% (Economic Survey and MoSPI, at current prices).
Private corporate and household GFCFs: Private corporate GFCF’s GDP share averages 10.7% in eight fiscals of FY15-FY22 (current prices) for which data is available. This is a fall from 11.9% in FY16 (to 10% in FY22). In comparison, it averaged 12.7% in the previous decade with a peak of 16.9% in FY08. So, private corporate GFCF as a driver of growth has weakened.
Households (private) contributed an average of 11% of the GDP in the current decade, against 12.9% in the previous decade (both in current prices). This has weakened. The 2004-05 series clubs private corporate with households to mark “private” GFCF, and hence, avoided.
Does the RBI’s theory hold? The answer is ‘no’ because the GDP shares of two growth engines are down in the 2011-12 GDP series: PFCE (56.8% now against 56.9% then), GFCE (10.1% now against 10.4% then). GFCF, the third engine, is up (32% now against 31% then), taking the combined investment (GFCE plus GFCF) up (42.1% now against 41.4% then).
But in the 2004-05 series, all three are own (PFCE, GFCE, GFCF and even GFCE+GFCF).
In a shorter time span, the post-pandemic fiscals of FY22-FY24 (2011-12 series) saw mixed trends – the GDP share of PFCE maintains a secular rise and then suddenly falls in FY24 (AE1); GFCEs keep falling, GFCFs keep rising and that of combined GFCE and GFCF also keep rising.
Interestingly, the RBI assumes growth in investment from (a) “anecdotal evidence” pointing to “home renters becoming owners of bigger homes” and (b) “the rate of real fixed investment is at a historic high in 2023-24” due to “high corporate profitability quarter after quarter”.
RBI’s own data for Q1 of FY24 (August 2023 bulletin) on private “envisaged” investments (intentions, not actual) also reflects a declining momentum. The Bank of Baroda/CMIE data shows Private “envisaged” investment continued to decline in Q2 and Q3 of FY24. Besides, corporate profit is no indicator of capex – which, ironically is moderating in FY23 and FY24. As for house sales, the Knight Frank India data shows the sale of luxury houses overtook that of affordable houses in Q2 of FY24 – pointing to K-shaped growth (as is the case with vehicles, smartphones and many FMCG items).
Outside the GDP data, three other investment indicators can be considered.
FDI inflows: The DPIIT data show, it grew at an average of 8.4% during the nine fiscals of FY15-FY23 and by H1 of FY24 it declined by -31% (y-on-y). The previous decade saw FDI growth averaging 31%. So, FDI also has slowed down considerably.
VC funding for start-ups: It has fallen to the lowest in 2023 since 2019 as start-ups go through a prolonged “funding winter”.
Bank credit outflow: The RBI bulletin talks of high growth in bank credit – ignoring its own clampdown on banks and NBFCs due to an alarming rise in “unsecured” personal loans for the past two years. It raised the capital adequacy ratio (CAR) for banks and NBFCs on November 16 by 25 percentage points to prevent a meltdown, having ignored the fact that personal loans were driving credit growth and overtaking credit to industry, services and agriculture. Meanwhile, the RBI Governor warns against “exuberance in lending” for three months of November, December and January.
These facts and evidence don’t point to a “shift” to investment-driven growth. Further, the decadal GDP growth is down – from 5.9%, from 6.8%.
What is driving growth in the decadal comparison – if not consumption and investment?
Significant changes in the GDP share come from three components: (i) net exports are down to -2.4% of the GDP, from -3.7% in the previous decade (ii) inventories (change in stocks) and valuables are down to 2.7% of the GDP, from 4.9% and (iii) discrepancies have doubled to 0.8%, from 0.4%.
A fall in net exports is mainly due to a significant drop in imports, down to 23.6% of the GDP in the current decade, against 25.4% in the previous decade (difference of -1.8 percentage points). But this is bad news because exports – the only remaining growth engine – are down to 21.1% of the GDP from 21.7% in the previous decade.
The questions that beg answer are: If all the four growth engines – consumption (PFCE, GFCE, GFCF and net exports) are down what really is driving growth? What will drive higher growth going forward? These questions bring back another question: When will the 2011-12 GDP series will be replaced for the most significant statistical data? These are the points to ponder for economists and policymakers.
