The debate surrounding India’s economic growth, as indicated by reported GDP numbers, continues to be a topic of contention. Recent evidence suggests that the country is experiencing a significantly distorted K-shaped trend, with some sectors thriving while others struggle. In this article, we delve into the details of India’s economic landscape, focusing on its impact on households (HH), which account for 76% of the country’s GDP.
The Key Drivers of GDP Growth
In recent years, two primary drivers have fueled India’s GDP growth: substantial government capital expenditure (capex), constituting 7% of total spending, and robust leveraged consumption. However, a closer examination reveals structural weaknesses within the economy’s endogenous growth components.
Private Capex Revival
RBI’s data from August 2023 on project approvals by banks and financial institutions shed light on the shallowness of the claimed private capex revival. While the total cost of projects sanctioned by these entities increased by 14.9% on a three-year compound annual growth rate (CAGR) until FY23, reaching Rs 2.7 trillion, it is predominantly concentrated in the non-industrial sector, particularly infrastructure (Rs 1.6 trillion). This sector heavily depends on government capex, raising concerns about the lack of job creation in the manufacturing sector. This concern is supported by the latest Periodic Labour Force Survey (October 2023).
Household Savings
A 19% year-over-year decline in the net financial savings of households in FY19, as reported by RBI, was initially seen as a sign of rising household confidence in their current and future incomes. However, the data suggests a different narrative, aligning more with Modigliani’s life cycle hypothesis (1955). A decline in the real income of workers relative to retirees has led to a decline in savings as consumption for the saving cohorts adjusts slower than the erosion in real incomes, prompting leveraged spending.
Empirical estimates for FY08-FY19 indicate that a 1 percentage point decline in real income corresponds to a 0.6 percentage point decline in consumption, resulting in a decrease in HH savings (-0.3 percentage points). Thus, the contraction in HH savings and the declining savings rate since FY12 can be attributed to slowing or declining incomes rather than abundant incomes.
Household Incomes and Real Per Capita Income Growth
Considering actual net financial savings data from RBI (-18.8% year-over-year in FY23), an estimated 6.2% growth in physical savings, and a 12.5% decline in investments in gold and silver (trade data), overall savings for HH in FY23E are estimated to have contracted by 3.7% year-over-year. When adding household savings to private final consumption expenditure, household incomes grew in real terms by 3.1% in FY23 and 2.8% on a four-year CAGR, resulting in real per-capita income growth of 1.7%, the lowest in 40 years.
Impact of Government Capex and Stock Market Capitalization
The net-worth effect from the rise in stock market capitalization has had minimal impact on HH spending. While government capex has a marginal positive impact on HH spending, it significantly depresses HH savings. The higher real interest rates and increased tax incidence from government capex have led to a crowding-out effect rather than the expected crowding-in effect.
Employment Situation
India’s employment situation has also seen significant changes:
- The latest annual periodic labor force survey (PLFS) for 2022-23 reported a decline in the estimated unemployment rate to a 5-year low of 3.4%, down 1 percentage point year-over-year.
- There has been a concomitant rise in the labor force participation rate and the worker-population ratio, primarily driven by rural areas and young cohorts.
- However, there is a contrasting trend of a decline in mature rural males (30+ years).
- Rural males have shifted from agriculture and services to rural construction, while females have entered agriculture in both rural and urban areas.
- Work in higher-paying urban areas has contracted, while it has expanded in lower-paying agriculture and rural construction.
- There has been a 1.5 percentage point increase in self-employment (57.3%), largely due to contractions in regular and casual work, particularly in manufacturing, urban construction, and services sectors, along with a substantial decline in casual work in agriculture.
- Accounting for forced self-employment in rural areas, the estimated effective unemployment rate rose by 0.32 percentage points year-over-year to 25.4% in FY23.
Sectoral Employment
- The proportion of workers engaged in agriculture rose to 45.8% in FY23, up 0.3 percentage points year-over-year.
- The share of industry, including manufacturing, declined by 0.2 percentage points year-over-year to 12.3%, as did the share of services, down 0.7 percentage points year-over-year to 27.8%.
- The share of workers in construction increased to 13%, up 0.6 percentage points year-over-year.
Income Levels
- Aggregating incomes from regular (Rs 20,039 per month, 21% of workers), casual (Rs 8,547, 22%), and self-employment work (Rs 13,347, 57%), the average per-worker income based on PLFS is estimated at Rs 13,467 per month in FY23.
- This reflects a 5.9% four-year CAGR but translates into 0% growth in real terms, net of inflation.
Disconnect Between Real Earnings and GDP Growth
The estimated 1QFY24 real earnings growth remained low at 2.9% year-over-year, in contrast to real private final consumption expenditure growth of 6% in 1QFY24, as per GDP data. This disparity underscores a significant disconnect between the household situation, as revealed by the PLFS, and the strong real GDP growth.
India’s economic recovery displays a clear K-shaped pattern, with some sectors prospering while others face challenges. The household income situation, employment dynamics, and sectoral disparities highlight the complexities of this trend. As the country grapples with these issues, it becomes crucial to address the structural weaknesses in the economy to ensure a more equitable and sustainable recovery.
In the near term, the 2QFY24 results exemplify the impact of household budget constraints on consumer companies, particularly those in the lower arm of the K-shape. Meanwhile, sectors like the auto industry and luxury consumption represent the upper arm, benefitting from leverage but contributing to the overall disparity in India’s economic landscape.