What our GDP numbers don't tell us?

The Indian economy grew at 20.1% during April-June 2021(Q1) compared to the same quarter during the previous year. One can get carried away with the growth figures for Q1, however, we must remember that this growth was against a contraction in the Indian economy by 24.4% during April-June 2020. Therefore, a simple calculation would show that we haven’t yet reached pre-pandemic levels of output. A devastating second covid wave which was a disaster for most Indians also led to a revision in the GDP growth projections for the year FY21–22. The present projection by RBI set the growth rate at 9.5%

One can be most inclined to ask, What constitutes GDP growth? Can we celebrate just yet? Data does suggest that we might not be out of the woodwork just yet.

Going back to basic Macroeconomics, the total output in any economy will be a sum of 4 factors

Y= G + I + C + NX

Where, Y = Output , G = Government Spending , C= Private consumption

I = Private Investment , NX = Net exports

Each of these has a direct impact on the GDP, thus for great growth, you would expect to fire on all 4 cylinders. Each of these can also constitute a separate article on its own, but maybe for some other day.

Private consumption: This constitutes goods and services which ordinary citizens consume from grocery shopping at your local supermarket, buying cigarettes at a Kirana store to even holidays in Goa. All these come under private consumption. Now, here is the worry, private consumption has been stagnating in India for the past few years and the covid pandemic seems to have given it an even bigger blow. These lines from a recent CMIE report present a sobering picture:-

“The blow Covid-19 pandemic and the nation-wide lockdown rendered to consumption demand is exceptional. It has regressed India’s consumer market back into the time machine. Real PFCE in 2020–21 was not only 9.1 percent lower than it was in 2019–20, but also 4.1 percent lower than it was in 2018–19”

If consumption has declined, who is consuming less? The poorest of the poor who lost their livelihood during the pandemic have been hit the worst, It is not hard to imagine, as we saw daily wage labourers march from the streets of Delhi back to their villages as the lockdown was announced, the people had meagre savings and couldn’t afford to live in the cities without any work. It was unfortunate that at a time like this, the support from the state was also very minimal, I still believe that direct cash transactions should have been made to the poorest of the poor in order for them to survive and not worry about the fiscal deficit. Even now, as economic activity has resumed, people are most likely to save money rather than spend on consumption, especially the poor in India.

Another reason for the drop in consumption is best explained by Rathin Roy where he explains how the India growth story since 1991 has been driven by the top 150 million in India who have high disposable income and have been traditionally the engine for our consumption story. However, their consumption of Indian products is tapering off and they are spending their money abroad. This could be in form of sending their kids to the US or Europe for higher education or exclusively holidaying abroad etc. This would also explain why car sales have tapered off in the last 4 years, which have also seen the exit of 4 major US auto majors. Therefore, the next engine of growth in consumption has to come from the remaining 1 billion people. But this is unlikely if incomes don’t grow and there are no jobs for the poor. Now, where will these new jobs come from?

Private Investment: This refers to the addition to the physical stock of capital, like money spent on building factories, machinery, offices, etc. This probably is the most worrying number, As India has been through the most sluggish phase of private investment in at least a decade and after the heydays of the late 2000s, the growth rate in private investment has fallen drastically. As a percentage of GDP, it stood at almost 40% back in 2011, today it is down to 28.7% of GDP, businesses are clearly not increasing Capex and building capacities due to underutilization of existing capacity, as recent reports by RBI have put the capacity utilization at a mere 66%. Thus it is unlikely that businesses will increase their investments in increasing capacity unless there is an increase in demand. This now presents a classic chicken and egg problem. Companies are not increasing investment and creating new jobs due to poor demand, Also people don’t have jobs, thus there is low demand. So what do we do now? How do we bail ourselves out?

Government Spending: This is basically the spending that is carried out by the government, now the only way we can expect to stimulate both demand and investment would be if the Indian government comes in a big way and starts spending and loosens its purse strings. One way of doing that is by carrying out a massive infrastructure push, which will boost demand for products and jobs, which in turn should also have an impact on the overall demand for products and services. Unfortunately, the government has been reluctant in spending money for the fear of letting the fiscal deficit run high. However, these are dire times, which need desperate action, or else we may as well see growth in India completely stagnate. If private industry is not investing, the government has to come in a big way and spend money.

So, it is all doom and gloom? what have we done well so far? what do we attribute the growth in Q1 to?

Net Exports: As the name would suggest, the net of exports in an economy minus the imports. Now India has traditionally run a trade deficit. Also, India has never been a big exporting giant as well. We are not a China, or a Germany, or even Vietnam. Though there was a time during the golden run of the Indian economy from 2003–2010 when we saw exports increase exponentially and register 20% plus growth year on year and exports peaked to over $300 billion by 2010, but as with other things, the story since 2010 hasn’t been good for exports. In the next 10 years, India’s exports have remained largely flat and the export momentum was lost, until this year where we are finally seeing a boom in exports. Some have suggested that we might even cross $400 Billion in exports this year, which will bring much-needed relief to our beleaguered economy. But, what is fuelling this export growth. For one, the global demand is picking up due to the opening up of economies after the pandemic, this has also led to a massive increase in commodity prices.

Will this be sustained? Before we get too overoptimistic, one of the few things we need to look out for in our exports is that it is still heavily dependent on Jems, Jewellery, and Petroleum products. We have seen an increase in exports of other merchandise however it hasn’t been to the extent it should be. Therefore, a serious rethink needs to be done to diversify our export basket and especially try to become part of global supply chains.

However, the biggest spanner in the works to India becoming an export powerhouse is that we have been becoming protectionist. The fact that today India is not part of the major trade blocs is worrying. A trade deal with the EU and US has been in the works forever, but we just don’t see this coming through soon. Hopefully while we develop manufacturing in India through import substitution, we will embrace market competition and have an outward orientation.

I want to stay optimistic about India, but we do need to fire on all 4 cylinders if we want to replicate the growth rates of the mid to late 2000s which has eluded us since.