The finance minister will present the full budget for the current financial year in Parliament on July 23. It is timely to examine certain challenges India faces on the economic front and discuss the ways ahead.
The standout economic data at the moment is the 8.2 per cent GDP growth of FY24 which was powered by private investments but slowed by sluggish consumption growth. The trend line in the consumption growth chart (Figure 1) depicts a flat trajectory, indicating stagnant consumption expenditure since the second quarter of 2019. The quarterly average growth rate for the period 2019-23 has been a little less than 5 per cent.
It is a point of worry because an economy that is dependent on private consumption (contributing around 60 per cent to GDP) cannot afford a consumption slowdown. While consumption is sluggish, the unemployment rate is low (3.1 per cent, per the government’s latest PLFS). It stands to reason that it is not the number of jobs but the quality of jobs that is the problem.
Jobs focus
Job creation has happened mostly in un-remunerative areas like unpaid household work and casual work, where there is hardly any improvement in monthly earnings, as shown by PLFS data (Figure 2). The creation of good quality jobs should be the focus of the union Budget, with schemes for apprenticeships, reform of the skilling ecosystem, and incentives for hiring .
A related issue is the pattern of household consumption. Analysis of the latest household consumption survey released in February shows a notable shift in private consumption patterns since the last survey in 2011-12. The share of expenditure on monthly food consumption has come down in rural areas by 6.6 percentage points and in urban areas by 3.4 percentage points.
This has been accompanied by a corresponding rise in the share of expenditure on non-food items which bodes well as it signals a maturing of the economy.
However, this presents a problem with the reported inflation figures. If the share of consumption expenditure on food items has declined, then inflation measured by the Consumer Price Index (CPI) is overstating the true state of inflation, leading to excessive tightening of monetary policy.
At the same time, it must be noted that the recent food inflation has been high largely due to fruit and vegetable prices. The government’s task at hand is to address the inflation challenge by simultaneously updating the CPI basket to correct the estimation anomaly and to improve food supply chains through interventions in the agriculture sector.
The second area of concern is the trend in industrial production shown by the Index of Industrial Production (IIP). The average monthly growth in the IIP General Index suggests moderate growth at 3.7 per cent post-Covid — over April 2022-March 2024. However, growth in the indices for capital goods, infrastructure goods, and primary goods show higher figures of 11.2 per cent, 9.2 per cent, and 6.7 per cent, respectively.
The General IIP Index has been moderated by slow growth in intermediate goods (4.8 per cent), consumer durables (3.3 per cent), and consumer non-durables (2.7 per cent). The disappointing show in the growth of consumer durables and consumer non-durables may be attributed to a decline in demand as the latest consumer expenditure survey shows.
This brings us back to the urgency of job creation that will support the consumption and production of consumer goods while further enhancing the growth in the production of capital goods, primary goods, and infrastructure/construction goods.
A policy stimulus through tax breaks or subsidies is necessary for intermediate goods because it functions as a backward linkage in producing capital and consumer goods.
Third, a close look at the annual growth rate of private investments or the Gross Fixed Capital Formation (GFCF) shows a rising trend over the period 2015-2024. The average growth rate, post-Covid (2022-2024), has been impressive (11.45 per cent), which exceeds the pre-Covid (2017-21) average growth rate of 4.30 per cent. The 5-year (2020-24) and 10-year (2015-24) average growth rates were 5.68 per cent and 6.50 per cent, respectively.
Figure 3 shows a gentle rise in the trend in GFCF growth. The Budget must sustain this growth in capital accumulation by reducing regulatory costs, improving the ease of doing business, and attracting steady foreign investments.
Export thrust
Finally, a peek into exports data reveals considerable volatility. However, the trend shows a rising path of export growth (Figure 4). The average growth rate of exports was 4.36 per cent during the last 10 years (2015-2024).
Export sectors are job multipliers and need greater policy support through fiscal incentives, the creation of special economic zones, infrastructure support, and access to new markets. Since the contribution of non-oil exports in India’s exports basket is significantly lower than oil exports, we need an enhanced focus on export diversification.
Another area of foreign trade that needs policy attention is the concentration of exports. India’s major exports are confined to a few countries, such as the US, the UAE, China, the Netherlands, Saudi Arabia, and Bangladesh. Our exports should be spread over many countries.
India has a trade deficit with most trading partners. The countries with which India has a trade surplus include the US, the EU, the UK, and the Netherlands. Unlike Bangladesh and China, no Asian economy is among our top 10 export destinations.
We need to consider the “Look at Neighbours” approach and increase our exports to Asian giants like Japan, South Korea, and Indonesia.
Consumption, production, investment, and exports are the major engines of economic growth that need support in the Budget. Amplifying these engines will ensure faster economic growth.
Ansari is an Assistant Professor of Economics at the IIM, Kashipur, Uttarakhand; and Sensarma is a Professor of Economics at the IIM, Kozhikode
Rudra_Sensarma
Gyasuddin_Ansari