GDP growth robust, but sluggish consumption is worrisome

THE powerful growth rate (8.4 per cent) of India’s gross domestic product (GDP) in the October-December quarter of the 2023-24 financial year has expectedly been celebrated by the country’s rulers as a sign of its strength as it journeys towards ‘Viksit Bharat’. But several statisticians and economists have sought a more nuanced explanation instead of simply taking the new data at face value.

The most positive performance has been rendered by the manufacturing sector, in which the country has historically been far behind global leaders like the US and China, growing by a record 11.6 per cent. This would indicate that the production-linked incentive scheme, whose aim is to boost domestic manufacturing, is getting somewhere.

There is good news from the construction sector, too, which has grown by 9.5 per cent. Strong construction activity means more jobs for the least skilled, typically farmhands who don’t find agricultural jobs and so travel to urban areas in search of work.

But the not-so-good news comes from the agricultural sector, which actually moved backwards, contracting by 0.8 per cent. This is serious as nearly half of the country’s workforce is engaged in agriculture and allied sectors. Negative growth in agriculture means poor earnings in the farm sector, which translates into poor consumption demand, which in turn means a sluggish demand for the essentials marketed by FMCG (fast-moving consumer goods) companies.

If the countryside is unable to carry the can in terms of consumption, what is the state of overall private final consumption expenditure (PFCE), a key driver of overall demand? It grew by 3.5 per cent during the quarter, which has been described as the slowest in a couple of decades.

If private folks have not been consuming a lot, how is the government doing? The picture there seems to be quite dismal. The government’s final consumption expenditure actually decreased by 3.2 per cent. If this is intimidating, the good news is that gross fixed capital formation, which gives a measure of capital investment in things like plants and machinery, grew by a healthy 10.6 per cent. So, we may be seeing a situation in which capital investment is taking place but the government is not spending that much on itself and subsidies. In fact, there was a 54 per cent drop in subsidies in the third quarter.

The capital investment augurs well for the future, but the lacklustre state of agricultural activity needs to change. The government is laying store by a healthy rabi harvest and the fading away of the El Nino effect leading to expectations of a good monsoon in the current calendar year, which will help the main kharif crop move forward.

To get back to the overall growth figure, it has beaten the expectations of many economists. The Reserve Bank of India had projected a growth of 6.5 per cent. The high figure of 8.4 per cent was in small part the result of the lower base effect. The growth rate for the third quarter of the previous financial year (2022-23) was revised downward by 0.2 per cent. So, in comparison, the rate for the same quarter of the current year automatically did better by that much. But we have not yet heard the end of the story. There will be revisions in the growth rate for the current year.

There is a divergence between two growth rates — one calculated by the GDP route and the other by the GVA (gross value added) route — raising the question as to whether the GDP figure is overstated. Against GDP growing by 8.4 per cent, GVA grew by 6.5 per cent. GDP is calculated by taking the total value of output (goods and services) as measured by GVA (output value minus input costs) and adding to it taxes and subtracting subsidies. The high GDP figure has benefited from a sharp rise in net taxes which are estimated to have grown by 32 per cent in the third quarter of the current financial year. Additionally, the subsidy outgo fell mainly on account of lower outgo on fertilisers.

What economists find worrisome is the weak PFCE. This will translate into weak demand for the micro, small and medium enterprises (MSME), which will not be investing as they do not see better demand ahead of them. Right now, the bulk of private capital expenditure taking place is by the corporate sector, which is able to access institutional finance easily, whereas MSMEs are still having to go to non-institutional financiers or moneylenders. The government is expecting the private sector to take over the job of undertaking capital investment. In this situation, with an investment growth rate of around 32 per cent, the economy will not experience an overall growth rate beyond 6-6.5 per cent, as per experts.

For investment to rise across the board, not just in plants and machinery but in roads and bridges too, the critical element is PFCE. Consumption drives growth and investment follows consumption. Investment and consumption comprise around 80 per cent of GDP. As both FMCG corporates and MSMEs are currently facing headwinds emanating from low PFCE, we are continuing to see weak demand for items of regular consumption and high demand for premium products.

All this does not point to a period of higher investment which will let per capita income grow by an average 9.1 per cent over the next two decades to help the country become a developed nation (‘Viksit Bharat’) by 2047. A key area to begin with can be the low gross value addition that marks Indian agriculture. Agricultural productivity needs to grow, improving the returns from agriculture and rural private consumption.

It will also release farm labour to go and work in urban areas in low-skilled jobs such as those in the construction sector. Those with higher skills, such as carpenters, plumbers and electricians, have devised their own solution. A large number of these workmen are taking up jobs abroad, mainly in West Asia. At a higher level, there is also a demand for skilled workers from a country like Taiwan, which is facing the consequences of a falling birth rate. Thus, India may be on the way to becoming even more dependent on the remittances of its workers from abroad.