The interim and full-year Budget speeches of the Union Finance Minister for the current financial year, 2024-25, anticipated a robust GDP growth of 8% plus. Fairly soon thereafter, it was pared down to 7.2% by the RBI, the country’s central bank. In this context, the second-quarter growth of 5.4%—the lowest rate in two years—came as a disappointment and pushed down the first half-year’s increase to 6.6%. The Finance Minister and others in the government have termed it a temporary blip, assuring that growth in the second half would compensate for the earlier decline, keeping the Indian economy on track to achieve the projected expansion.
The hands-on Nirmala Sitharaman, who has weathered several economic storms since taking charge of the Finance Ministry over four years ago, has perhaps drawn inspiration for the sharp decline in growth in familiar factors: a slower pace of manufacturing, sluggish exports, inadequate private sector capital formation, geopolitical uncertainties, and a global trade slowdown. True as these might be, additional forces have also contributed to the significant drop in gross value-added growth—which reflects the actual production base—from a robust 14.3% to a mere 2.15%. Core industries such as mining and manufacturing struggled, and labour-intensive sectors like construction, electricity, gas, water, and other utilities also experienced notable setbacks. Recognizing these challenges, the Reserve Bank of India promptly revised its growth projection for the entire year further downward to 6.6%.
Such developments are worrisome since they point towards more fundamental shortcomings that take effort and time to fix. The slowing pace of growth in GST collections over the last three months, the decline in sales growth for fast-moving goods from 11% in the preceding year to 2.8% during the August-October 2024 festive season, the withdrawal of $11.8 billion by foreign investors from the Indian capital market in October 2024, and an additional $2.5 billion in the following month, are all symptoms of the malaise. For most of the last five years, the buoyancy in the equity market, loosely referred to as the Bombay Bulls, seems to have clouded emerging ground-level conditions and lent a somewhat unrealistic confidence about the economy.
The stock market exuberance and the digitization of Indian finance have largely overlooked the fact that much of Asia is grappling with the realities of the “Asian Dream”—a vision of making life better, richer, and fuller for everyone, with opportunities based on ability and achievement, as described by J.T. Adams for the American Dream in 1931. Sustaining economic growth requires several targeted measures and shifts in orientation.
On the positive side, compared to the 37 years between 1954 and 1991, when India’s GDP growth per capita was just 1.6% annually, the subsequent 32 years (1991-2023) saw this figure rise significantly to 5.2% per annum (as noted recently by Martin Wolf in the Financial Times). Also excluding the five affluent ones, namely Japan, South Korea, Taiwan, Hong Kong, and Singapore—the pace of middle-class expansion in Asia has slowed. From an annual addition of 19 million households during the 1990s and 2000s, it declined to 12 million per year in the 2010s. Notably, since 2021, almost the entire growth in Asia’s middle class has come from India, according to the Economic Intelligence Unit, as reported in The Economist.
AN ANALYSIS OF THE INDIAN GROWTH STORY
The post-1991 trend and broad policy regime have persisted ever since. However, as per the World Bank, the share of manufacturing in India’s GDP fell from 16% in 1991 to 13% in 2023 despite the liberalization of organized industries. Alongside, the ratio of trade to GDP—which had shot up after the reforms—has been declining. Inequality has risen dramatically, with the share of income of the top 1% of Indians increasing from 10% in 1991 to 23% in 2023, and that of the top 10% rising from 35% to 59%. Correspondingly, the share of the bottom 50% fell from 20% to 13%, despite the 180% increase in their real incomes and a significant decline in the number of people in extreme poverty (World Inequality Database, 2024).
The primary causal factor has been the slowing down of both aggregate investment and consumption. Higher post-Covid capital formation was largely due to the significant step-up by the Union government in physical infrastructure like highways, railroads, and airports. As infrastructure spending tapers off—despite an 11% increase in budgetary allocation compared to the previous year, aimed at reducing the fiscal deficit to 4.5% of GDP—overall investment in the economy is on the decline. Private investment has also been shrinking, dropping from 25% of GDP in 2008 to just 13%-14% since 2020. This decline is not due to a lack of resources, as surpluses in ongoing businesses have consistently grown, barring a dip in the July-September 2024 quarter. Instead, the primary constraint has been the sluggish expansion of domestic demand, which has deterred further investments. Additionally, external trade has stagnated, while the influx of cheap imports from China has further compounded business reservations about scaling up.
Persisting headline inflation, exceeding 6% since 2020, and a 35% rise in the prices of food and beverages has eroded the purchasing power of the poor and recent entrants to the middle class—those with the highest propensity to consume. Corresponding wage increases, particularly in large cities, have not materialised. Many city workers who had returned to villages during the pandemic have chosen to stay back because of the joint family security. The upper classes, including senior employees, who have disproportionately benefited from India’s economic growth, do not add much to aggregate domestic consumption. Unsurprisingly, urban consumption has been declining of late.
With marginal additional capacities, job creation in India has decelerated. The Indian worker, particularly the less skilled and women—whose workforce participation is ticking up, especially in agriculture and self-employment—continues to struggle due to declining real wages and growing joblessness among the youth. The lack of flexibility in firing workers under the Factories Act remains a deterrent to hiring additional workers, even in labor-intensive industries like apparel manufacturing, where India could have stepped in to take advantage of disruptions in Bangladesh and growing US reservations about Mexican merchandise. Inadequate skills have also emerged as a significant constraint in several vocations and industries.
STRUCTURAL ISSUES TO PONDER OVER
The emphasis on agriculture needs reinforcement. Despite a meagre and reducing share of 18% in GDP, agriculture supports 120 million agricultural households and 140 million labourers; as many workers as the rapidly growing services sector that contributes 55% to GDP. Factor productivity is reasonable, considering that 60% of the arable land is monsoon-dependent, 90% of the land holdings are under one hectare, and 46% of the workforce is engaged there, fully or part-time. Research suggests that reducing the agricultural workforce by 100 million, without impacting output, and engaging them in agro-processing and related pursuits in rural settings could be beneficial. This reduction might also improve per-acre productivity by reducing idle hours for those remaining on farms.
The Center and states, directly responsible for agriculture, must become more proactive in addressing seasonal and structural issues facing farmers. They need to better manage the Minimum Support Price (MSP) mechanism, guaranteeing crop offtake prices. MSP should ensure reasonable profits above costs, including assumed costs of family labor and land interest value, akin to costing in other sectors. A fresh set of laws must be enacted after broader stakeholder consultations. MSP could be limited to land holdings up to four hectares and gradually shifted away from water-guzzling crops like wheat, paddy, and sugarcane. Assurance should be in the form of cash equivalents rather than physical procurement, bridging the difference between MSP and prevailing market prices. Such certainty in realizations would help curb the incessant migration to nearby towns and alleviate the financial burden on public agencies tasked with providing additional, costly amenities in urban areas.
MGNREGA, the national rural employment guarantee scheme, calls for revamping to alleviate rural distress. Funding for it should be allocated upfront in Union budgets rather than through supplementary demands, which delay reimbursements and implementation. There’s little justification for keeping MGNREGA wages lower than the regional minimum wages and not adjusting it in line with inflation. In the near future, the Union Government may consider introducing such an employment scheme in the urban areas as well but impose the legally mandated obligation to guarantee providing jobs upon demand upon itself and the state governments in a gradual manner and over time. In the absence of a Universal Basic Scheme, such a measure would help provide a degree of the much needed social security to most citizens.
During the current fiscal, bank credit has declined, impacting both consumption and investment activity. In view of growing loan defaults, the RBI mandated a higher cash-credit ratio. While private banks were prudent, most public sector banks had been less careful. This regulation has dampened enthusiasm, disproportionately affecting small and medium enterprises compared to large borrowers. Along with the high policy interest rate of 6.5%, which the RBI has maintained for 11 consecutive quarters, liquidity levels have reduced, curtailing economic activity.
Clearly, there is need to disaggregate the Services sector and not treat it as one homogeneous industry. Hundreds, if not thousands, of its constituents contribute to the 55% of GDP and employ 400 million workers, mostly informally. Well-defined policies and programs for each is the need of the hour, with roles and responsibilities of the Center and states clearly demarcated. India’s comparative advantage in knowledge-based activities can be easily furthered with greater state support and well negotiated bilateral as well as regional trade pacts. Notable sectors currently experiencing sluggishness include IT software, tourism, and transportation.
In the longer run, the Indian state must revisit the crucial subjects of education and healthcare. An incremental approach in their budgetary provisions and effecting minor policy tweaks will not suffice. The welfare and productivity of the population are linked to these two critical elements. Neither can be left largely to private initiatives or funding.
China’s bottom-up approach, prioritizing access to primary and secondary education since the 1950s, offers valuable lessons. While universal school enrolment may have been achieved in India, the quality of education is far from satisfactory and amenable to vast improvements to be of greater daily use and to make the youth employable. Dropout rates, especially among girls remain unduly high and warrant greater attention, and the focus of college education needs to shift from humanities and commerce to physical sciences, natural sciences, and engineering. Such reprioritization would provide for a stronger foundation for indigenous R&D, technology- incorporation, and absorption of advanced vocational training. Improved primary healthcare, largely state-provided is essential, and not merely an insurance coverage as being worked at currently, while tertiary care can remain the domain of the private sector.
* Dr Ajay Dua, a former Union Secretary of Commerce & Industry, is a development economist by training.