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It is always difficult to objectively explain the state of the Indian economy. It is similar to what The Economist said about the Mona Lisa-like global economy, which looks different when viewed from different positions. Commentaries generally take the position that India is well positioned and we are well positioned to be an economic superpower. His assumption of the presidency of the G-20, albeit coincidentally, is seen as vindication of this position. So what is the real picture?
The MPC meeting minutes give the impression that inflation is under control, which is why the majority of members argued for the status quo. This is fine from a political point of view, but it is worrisome for households who are seeing a relentless increase in the prices of goods and services. The primary effect will certainly lower the inflation numbers, but that only pleases the policy maker. Interestingly, we’re glad the inflation number came in below the upper range of tolerance – the 4 percent number is still a bit far off. Households will continue to complain that their cumulative inflation rate has risen to more than 18 percent in the past three years.
The growth picture is also contradictory. We are definitely the fastest growing economy – by 6-6.5 percent – leaving aside the small states. This is what those who are convinced that all is well and that the specter of Covid is behind us are posting. But this picture is also different when viewed from a mid-range perspective. There’s not a lot of optimism about being on track to achieve a growth rate of more than 8 percent, which we used to have earlier. The new normal appears to be 6-7 percent.
There was much satisfaction expressed by the new highs achieved in exports of goods and services. While services were certainly against the trend of a global slowdown in 2022, merchandise exports are not very satisfactory. For example, if refinery products are excluded from the export basket, there has been a decline in FY23. This is after all valid votes have been generated in the Production Linked Incentive (PLI) scheme making India the hub for all global chains. It seems only an ambition as of today and the distance to be traveled is long. Indian exports are closely linked to global growth and the slowdown does not bode well for them. In 2022, higher crude oil prices are reflected in imports and exports.
Next, there are two aspects to the investment picture. The official position is that investment is picking up in the private sector, which should ideally be reflected on the financing side. In fact, the investment secret meetings held by some states had many large companies showing a lot of interest. But in the past, these were mirages because signing MoUs means little when they are not translated into action. Data for all funding sources shows that there is a slowdown. Bank credit rebounded more at the retail end than manufacturing. Debt issuances are dominated by the financial sector as industrialization lags. The rate of external commercial borrowings (ECBs) has slowed mainly due to the rising cost of loans. Hence, while many companies have indicated increased investment, this seems, so far, to be more intention than action.
The consumption picture is also not clear. While there are reports that rural demand did well in fiscal ’23, the same was not reflected in the production of consumer goods. A 16 per cent growth in nominal consumption in FY23 would equate to just 7 per cent in real terms, as inflation pushed up costs. This was also caused by pent-up demand for both goods and services after the complete removal of lockdown in 2022. Also, this was the time when households saved the least – as reflected in the slow growth in deposits. So, going forward, it will be interesting to see if the rhythm can be maintained.
Ultimately, a growing economy needs to create more jobs if consumption and investment are to be sustained. The average unemployment rate, according to CMIE data, is around 7.5 percent, which can now be considered the “normal” rate of unemployment in India. But the concern is more about the work participation rate, which has fallen—from 46.2 percent in fiscal 2017 to 39.5 percent in fiscal 2013. This is serious: It indicates a growing working-age population that is not interested in working. If one combines this with the series of layoffs at several IT/fintech companies, the picture gets even bleaker. The promise shown by the startups has not yet materialized and therefore, they have not been as much of a job creator as might have been expected, given the push given by the government over the years.
The bright spot in this picture is the banking sector, which has emerged from the gloom that surrounded it in the second half of the past decade. The clean-up and slowdown in the economy, which reduced the demand for credit, helped banks, especially those operating in the public sector, emerge stronger. NPA levels are down and banks are well capitalised. Also, profitability has improved since asset quality control means lower provisions for NPAs. The implication is that when the economy enters take-off mode, banks will be well equipped to save money, which was not the case 4-5 years ago.
The fiscal year has started well as the government has already made it clear that the budget will be prudent and that there will be no largesse even in a pre-election year. Monetary policy has stalled. This could be for a long time, depending on how inflation moves in the coming months, and the views of MPC members. The global economy will slow, and local initiative must move the story forward. The broad numbers sound statistically realistic, but the triad of employment, consumption and private investment should pay off.
Sabnavis is Chief Economist, Bank of Baroda, and author of Banking Trends and Controversies. Opinions are personal
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