On hearing the news of India’s FY22 GDP growth announced a few days ago, you might think – like the Indian government and some sections of the media – that ours is the fastest growing large economy. Never mind that the fourth quarter was the slowest growing in a long time – 4.1% – and that the full year numbers were hugely skewed by the first quarter when India’s GDP grew over 20% thanks to a base effect.
The fourth quarter’s growth of 4.1% looks even slower when you consider that in Q4 of FY21, the Indian economy grew only by 2.5%. Here, we didn’t even benefit from a base effect, it seems. Overall, one has to say that India’s GDP numbers tell a story in two parts, and nothing is quite as straightforward as it seems. For the full year, our economy grew strongly, at 8.7%, helped by a base effect. Manufacturing and construction as well as the services sector all grew strongly on the back of reopening after lockdowns and pent-up demand. Manufacturing and construction, in particular grew by 9.9% and 11.5% respectively.
In the fourth quarter, however, it is manufacturing and construction that have slowed down the most, with the former contracting by -0.2% and the latter growing by just 2%. This is also due to a base effect over the same quarter in FY 21, when they grew by over 15% and 18% respectively.
Looking at private final consumption, which is the mainstay of the Indian economy and tells us of the strength of consumer demand, it grew by a mere 1.43% over FY20, but managed to maintain its share of GDP at 56.9% over the same period. For Q4 FY22 alone, though, private consumption grew by 8.33% over Q4 FY20, and its share of GDP too has grown from 54.6% to 55.5%.
When it comes to gross fixed capital formation, a measure of fixed asset investment in the economy, it grew in absolute terms by 3.75% in FY22 over FY20 and its share of GDP too grew from 31.8% to 32.5%. In just Q4 of FY22, however, gross fixed asset investment has grown by 15.7% over Q4 of FY20, and its share of GDP has grown from 31% to 33.6%.
What can we make of all this? That consumption is what our economy has depended upon, but that this engine is slowing down. That investment has grown, though we don’t know the composition of the investment by government and private sector, and that we will see the results of that investment in the next two to three years ahead. Meanwhile, we have the services sectors recording the strongest growth, especially in Q4 FY22, as a result of the Covid pandemic waning, while manufacturing goes into a slower mode, perhaps because of supply shortages as well as inventory build-up.
I noticed a little-reported metric in the GDP document on MOSPI’s (Ministry of Statistics and Programme Implementation) website called “Changes in stocks” which, I am assuming, means changes in inventory. Strangely, those quarterly figures show remarkable volatility from year to year and might hold the key to understanding the kinds of adjustments being made between demand and supply. For FY22, there appears to be a near-doubling of changes in stocks over FY20 levels, while for FY21 these had gone into negative territory.
It tells me that inflation is bearing down on consumption demand and that with inventories building up, manufacturing too is likely to go into a slowdown. Services might grow for a couple of quarters more, since they have recovered with a huge lag, but with inflation of most goods, especially fuel, rising, there is likely to be a slowdown there as well.
Already, there are news reports of FMCG or CPG sales slowing down in rural India, according to research by Nielsen IQ. There is also news, related to the fall in rural demand, that smaller CPG companies – including many regional players – are being adversely impacted by inflation. This means greater concentration of market power for the larger companies, who have many more brands to hedge their cost and pricing strategy with, and also have greater distribution muscle.
What’s most important from a growth point of view is that for investment to pay off over the next couple of years, we need to keep manufacturing and overall economic activity buoyant or at least at an even keel in the meantime. And for that to happen, we need to control inflation urgently, as well as create more good quality and well-paying jobs.
On the inflation front, it has been stubbornly high for the past couple of years, even during the pandemic largely due to high fuel and food prices. Even if we take those out and look at core CPI, it is at elevated levels across a range of products and services, and stubborn at 6%-7%. While inflation is a global problem thanks to crude oil and commodity prices, in the case of India, raising excise and taxes on fuel for several years has finally sent the chickens home to roost. The central government and the state governments are looking to each other to solve the problem, but in my view, the larger steps have to be taken by the government at the centre, since it is responsible for several hikes in central excise and cesses, which accrue to the central government alone. This is even more reason why fuel, and indeed, electricity ought to be brought under GST as soon as possible.
We must remember that inflation is likely to get worse in the year ahead, thanks to supply shortages created by the Ukraine crisis, as well as China’s slowdown due to Covid outbreaks and its zero-Covid policy. Recent news of Shanghai and Beijing relaxing some of their strict lockdown restrictions is good news, but we have to wait for much longer to see the pandemic wane in China.
On the employment front, India has much to do to remedy the situation which has lasted decades in the country. As I have written recently, we have more than half the working age population of the country not at work. It is indeed shocking that India’s already low overall labour force participation rate of 46% in 2016 crashed to 40% in 2021. For women, the situation is even more dismal; women’s labour force participation rate has fallen steadily from 32% in 2005 to 23% in 2012 and further to 19% in 2021, according to the ILO-modeled estimate from the World Bank.
If we rob people of their power to earn a living, what chance can the economy have at increasing consumer demand and production? We can gloat over being the world’s fastest growing economy, but it is not sustainable since it is not creating jobs at the same pace. In fact, more people seem to be dropping out of the workforce. And when we say that our unemployment is 7.1% for May 2022 according to CMIE, let us also remember that this is 7.1% of the 40% that is looking for a job. It doesn’t include the 60% outside the workforce, even though they are part of the country’s working age population, aged 15-64 years, who number over 928 million in India according to the World Bank. That amounts to over 556 million people, not working or looking for work in our country.
At the same time, we gloat over the fact that we have a burgeoning middle class in India, who are also known to be the consuming class. That used to be in the region of 350 million or thereabouts; with the shrinking workforce, there’s no saying how much the middle class might have also shrunk.
Then, we have the informal nature of employment in our country, with the informal sector creating 80%-90% of jobs. In recent years since demonetization in 2016, and especially during the pandemic as well as due to inflation, we have MSMEs unable to operate and compete with large businesses, and many shutting down as a result. This aggravates inequality as well as unemployment.
As a nation that prides itself on entrepreneurship, we cannot have small businesses struggling to survive. I had written in an Owl Wisdom Podcast sometime ago that one of the ways we could reform our industrial policy, is to provide special assistance to MSMEs in certain industries with a view to encouraging R&D, and allow them to specialize, innovate and grow, in a way similar to Germany’s Mittelstand businesses. I am afraid this might have been interpreted to mean only IT-based businesses or only digital platforms and start-ups; industrial policy has to be much broader and must go beyond these narrow definitions.
Many of the newly minted unicorns and start-ups that had also recently listed on the Indian stock market seem to have lost value subsequently. It is not merely a regulatory concern with any specific company, but a wider macroeconomic problem as well. Returning to the state of the Indian economy, we have seen significant capital outflows since the start of 2022 and that would have affected these start-ups as well. This was to be expected with the US Federal Reserve raising interest rates to combat raging inflation; the return of capital to the US has meant the strengthening of the US dollar against all major currencies. The Indian rupee has fallen appreciably as have other emerging market currencies, but what’s telling is that even the Euro is now at par with the US dollar.
All this makes our surging imports even more expensive and puts our external debt repayment – a lot of which is corporate – at risk. In fact, even without the Ukraine crisis and the spike in global inflation arising out of it, economists had forecast India’s current account deficit to nearly double to over 3% of GDP. We don’t have the official figures for India’s CAD for FY 22 as yet, but there were media reports that by December 2021, it had already reached 2.7% of GDP.
There are limits to growth, especially jobless growth. Anyone who needs to be reminded of the limits needs to only look back at India’s recent pre-pandemic slowdown from 2016 to 2020.
Therefore, let us look at last year’s growth for what it is: a base-effect-fuelled recovery. And let us also anticipate an economic slowdown in 2023, as many economists have already forecast.
It’s time we control inflation in earnest. It’s also time we get real and find ways to get India back to work.