Not only are we past halfway through 2024, we are still digesting the full Union Budget for FY 25 post the Indian parliamentary elections held a few months ago when the NDA government has begun its third term, albeit as a coalition government this time around. We are also in the midst of the corporate earnings season for the first quarter of FY 25, so there is plenty of economic and corporate news to make sense of.
Corporate earnings have just started trickling in, and there seems to be a slight improvement in the big tech companies’ earnings this quarter compared to the last two quarters which were weak due to the global slowdown in overseas companies’ tech spends. Though most Indian tech giants still maintain that the outlook is not very bright yet and that the global economic slowdown is likely to be with us for a while. I have written about how this is so vastly different from tech companies’ earnings and stock prices in the US, which are seeing something of an AI and chips asset bubble.
Anyway, as I have also written recently, we are still in a government capex-led growth phase in India which has continued through the Covid-19 pandemic and well after. Private business investment – on the ground capex – has not picked up significantly, even if stock markets have been rallying to all-time highs. This, despite most commentary from stock market experts in the news being about already high valuations in the Indian market. I am not interested in stock markets beyond the fact that they might sometimes be a barometer of economic health, but I think the current rally not merely in India but around the world seems to suggest that there is still a lot of easy money around and that investor appetites are still huge. This, when central banks have all mostly been in a rate and liquidity tightening phase. From what I have been hearing and reading in the business news, it appears that most of it is big-tech and AI-led, though in India it appears that it is the mutual funds industry that seems to be on an explosive growth momentum. Anecdotally, I know that almost every second or third day, there is a new fund offering around a new theme, because I receive so much of this kind of email from my bank, when I am broke and unemployed!
The strange thing is that this equity markets rally in India is mostly fuelled by domestic investors, when foreign investors are still pulling money out of India; I hope SEBI is keeping a close watch on any potential asset bubble that might soon burst. The boom in the capital markets is good to see, but we need long-term capital which tends to be in debt markets and that is not very deep or well-developed in India yet. From what I have been reading in the news, there is great expectation and anticipation that billions of dollars are going to flow into Indian debt markets this year, thanks to India being included in the JP Morgan index. This is good, though I wonder what it might do to the Indian rupee and RBI’s fight against consumer price inflation. And while I agree in part with what Naina Lal Kidwai has written in The Economic Times about strengthening our capital markets and that being an ask of this Union budget, I don’t think continuing to do more of the same will put our economy on a higher growth trajectory on a sustainable basis.
For the simple reason that the biggest problem the Indian economy faces is not lack of adequate capital. It is a lack of jobs and employment that can keep millions in India gainfully and productively employed. And by that, I also mean good quality jobs that boost the earning capacity of Indians, so that their living standards may improve and that they may be able to spend more on products and services that keep an economy chugging along at a reasonably good pace. The surge in consumer demand that one saw post the Covid-lockdowns were just that – a small surge in pent-up demand. Consumers have mostly reverted to the mean, spending and saving the way they were before, except with an added risk now. That of higher personal and household debt, which I imagine is mostly unsecured debt since it is on credit card spending and loans through NBFCs. This is what triggered RBI’s warning to NBFCs and banks regarding the spike in consumer debt, when incomes are in no way rising as fast. This combination of low consumer demand – especially in rural India – and higher consumer debt mostly in urban India, I would think, is a sign of consumers wanting to spend more but being unable to afford most discretionary purchases.
This perhaps also helps to explain the sudden fall in India’s household savings rate, which is said to be somewhere between 17% and 18% of GDP, though exact figures are not available anywhere. I thought RBI’s bimonthly report of professional forecasters dated June 2024, which I found on their website ought to have had this figure. Instead, it forecasts India’s gross savings rate at 30.1% for FY 25 and 30% for FY 26, where it is defined as percentage of gross national disposable income, not share of India’s GDP. I find this odd, since disposable income is net of taxes and cannot be gross!
Weak consumer demand in India is something I have been writing about for a long time on my blog, and last quarter’s GDP as well as the full FY24 GDP figures showed that private consumption grew year-on-year by around 4%, though gross fixed capital formation grew by 6.4% and 8.98% respectively. Of course, data for how much of this was private business investment is not available, but as I wrote then, it seems that government capex was doing most of the heavy lifting. This, despite all the PLI schemes to boost manufacturing. And despite all the tax breaks that corporates have been receiving since 2019.
The latest figures for India’s overall unemployment rate from CMIE is 9.2% for June 2024, while the Indian government’s NSSO survey PLFS (Periodic Labour Force Survey) for last year 2023, shows the overall unemployment rate at a mere 3.1% based on “usual status”, which goes up to 5% for “current weekly status”. This is the first time I am looking at the PLFS survey in any detail, and I am appalled by what appears to be mischievously motivated nonsense, for which I suspect unprofessional PR agency idiot bosses in Delhi and their cronies in RK Swamy/BBDO Chennai. If you glance at the PLFS Quarterly Bulletin Jan-March 2024, and look at the LFPR (labour force participation rate) for women by state, in the current weekly status (which is the only one cited in the bulletin), you will find unusually low LFPR for women in Delhi, Haryana, Uttarakhand, Uttar Pradesh, Rajasthan, Bihar, Jharkhand, and Madhya Pradesh in the 15 years and above segment. This strikes me as nonsense, especially when you consider that a person who has worked even one hour in the past week (current weekly status) is considered employed! There are other problems with this survey as well, such as using the same criteria to measure unemployment and employment in India’s formal and informal sectors as well as urban and rural India. It strikes me as nonsense once again being devised to fool the country.
According to this Economic Times article, new private investment plans in India have slumped to a 20-year low in the April-June quarter of 2024, amounting to just Rs. 44, 300 crores. I think the private sector in India is waiting to see a more sustained revival in consumer demand as inflation ticks down, which in turn depends on enough well-paying jobs being available.
As I had written before, I think it is time to try incentivising private business investment on the basis of employment generation, rather than production quantities or revenues. And this can work for both large companies as well as MSMEs, and across all industries and sectors. The incentive needn’t be in the form of a corporate tax break, but in the form of a subsidy specifically meant for upgrading employees’ digital and technology skills. This way, you achieve twin objectives: of improving employment by the private sector, and of upskilling them in digital and tech-related skills that are needed today and in the future. The Indian economy doesn’t just need a stronger, more productive workforce, it needs a future-ready workforce.
In addition, I think this Union Budget should point towards a new industrial policy, the kind that I have been writing about, in order to boost and formalize India’s large MSME sector. The biggest problem MSMEs face is in raising adequate capital and financing their growth plans. An entire financial ecosystem needs to be developed to help India’s MSMEs and entrepreneurs – not merely internet start-ups – in a wide range of industries and especially those that are future-oriented such as AI, bio-tech, clean energy, etc.
Together, incentivising employment generation and getting them future-ready, as well as helping India’s MSMEs grow and join the formal economy could supercharge India’s growth in a more equitable and future-oriented way. In fact, in an indirect way, the employment generation measure might also help remedy the problem of India’s private sector increasingly hiring contract labour – people not on the payrolls of the company – in order to save costs. If the government is serious about its vision of India achieving developed nation status by 2047, it has to invest much more in social infrastructure such as education and healthcare across the country. Almost every recent Union Budget shows a cut in education and health spending by the centre in absolute terms, when it ought to increase in order to keep pace with India’s GDP growth; at the very least, the spending as a percentage of GDP ought to be maintained, but sadly that has not been the case.
Of course, I have been writing all this ahead of this year’s final budget, which has just been announced today. The budget speech was a good one, with the emphasis on all the right areas: employment generation, rural development and MSMEs, besides clean energy. I was glad to see employment creation and the MSME sector given the right kind of importance as I have been writing about these for a while. The Economic Survey tabled in parliament – which I have yet to read since it was not uploaded online the day it was presented – also mentioned the importance of job creation and the MSME sector. However, the budget allocations have to speak for themselves, and this is where we usually fall short.
I am not sure about how the three or four schemes under employment-linked incentives actually work as incentives. Is the government going to reimburse companies for each of them, if the benefit actually goes to the new hire? Only in the case of the employer being reimbursed for their share of the EPF, is it clear that it is a reimbursement. To be honest, reimbursing employers for their share of EPF or salaries to new hires, is a bad idea; it sets a bad precedent and the very principle is wrong-headed to my mind, since employers and employees contribute equally to provident fund and for many years now, private sector companies have had their own provident funds.
The skilling ideas also require further improvement, without limiting ourselves only to ITIs. And the internship idea, which requires India’s top 500 companies to pay Rs. 6000/- out of their CSR budgets, in addition to the stipend of Rs. 5,000/- (called allowance in the document) which I presume is being reimbursed by the government, is also very strange to say the least. Which is why I had suggested that the incentive be in the form of subsidizing employers’ training and upskilling costs, depending on the number of new hires they recruit. I won’t be surprised if these kinds of strange ideas have come from unprofessional PR agency idiot bosses, as they wouldn’t have a clue as to how the professional world of business actually functions. And frankly, they shouldn’t even be in the corporate world, after all the nonsense they have perpetrated.
Coming back to the budget allocations, it is roads and highways that have received the highest fund allocation as before, while education and healthcare spends have been lower than what was allocated last year. This year’s budget estimate amounts are set at about the same levels in absolute terms. Which proves my point about the government’s priorities in terms of spends on critical areas being woefully inadequate.
I am not reacting to the income tax breaks under the new regime for the middle class, since I would always prefer to stay with the old regime. But I do think that the tinkering with the slabs and the rates was unnecessary; instead of adding new slabs in the middle-income groups, it might have been more progressive to have added a new tax slab at the highest income level, i.e. Rs 25 lakhs and above.
I do think the tax measures to tackle excessive speculative activity in the equity markets and discouraging frequent share-buybacks are good ideas and were absolutely necessary.
We are still in the midst of earnings season and waiting to see how corporate India is faring. It’s early days yet, but it appears that both revenue and profit growth are being tempered, after previous two years of blockbuster growth. This could mean that many companies will have to pass on lower commodity costs as lower prices to consumers before it starts to hurt consumer demand even more. In addition to tech companies, banks and finance companies in India are reporting a good set of earnings since we are still in a high interest rate environment, from the few that have already reported. Bellwether CPG giant, HUL has reported a very muted set of earnings for the June FY25 quarter with low single digit growth in both revenue and profit, and one will have to wait to hear management commentary. Hopefully the good monsoon will see a revival in rural demand in the coming quarters, which many CPG companies and auto companies rely on.
Developed nation status by 2047 is a tall order for India. And I am not sure that so much of road-building alone will take us there. If we are to supercharge the Indian economy, we have to build capacity and make our economy more competitive. Hopefully, this budget for FY25 which has the right intent will get its specific policies right and take us in the right direction through the third term that this government has won.
The featured image at the start of this post is of Mumbai by Ibrahim Poonawala on Pixabay.
Peripatetic Perch 