Objectively interpreting the state of the Indian economy is always difficult. It’s similar to what The Economist said about the world economy resembling the Mona Lisa, which looks different when viewed from different positions. Commentaries generally take the stance that India is in a sweet spot and that we are well-positioned to be an economic superpower. Assuming the presidency G20, though coincidental, is seen as a vindication of this position. So, what is the true picture?
The MPC meeting minutes give the impression that inflation is well under control, which is why a majority of members argued for a status quo. This is good from a policy stance but is worrying for households, which are witnessing a relentless increase in the prices of goods and services. The base effect will bring down the inflation numbers for sure but that is a delight for only the policymaker. Interestingly, we are happy that the inflation number has come below the upper band of tolerance — the 4 per cent figure is still some distance away. Households would still complain that they have had a cumulative inflation of over 18 per cent in the last three years.
The growth picture is also ambivalent. We are surely the fastest-growing economy — at 6-6.5 per cent — if one keeps aside smaller nations. This is what is being publicised by those who are convinced that all is well and the spectre of Covid is behind us. But this picture too is different when looked at from a medium-term perspective. There is not too much optimism about being on track for the 8 per cent-plus growth rate, which we were used to earlier. The new normal appears to be 6-7 per cent.
There has been a lot of satisfaction expressed by the new heights achieved in the exports of goods and services. While services have definitely gone against the trend of the global slowdown in 2022, exports of merchandise are not too satisfactory. For example, if refinery products are excluded from the exports basket, there has been a fall in FY23. This is after all the right sounds have been created on the Production-Linked Incentive (PLI) scheme making India the centre of all global chains. It seems to be only an aspiration as of today and the distance to be traversed is long. Indian exports are inexorably linked with global growth and a slowdown does not augur well for them. In 2022, higher crude prices got reflected in both imports and exports.
Next, the investment picture has two sides as well. The official position is that investment is picking up in the private sector, which should ideally get reflected on the funding side. In fact, the investment conclaves held by some states had many major companies showing a lot of interest. But in the past, these have been mirages as signing MoUs means little when not converted to action. Data on all funding sources show that there is a slowdown. Bank credit is buoyant more on the retail end than manufacturing. Debt issuances are dominated by the financial sector with manufacturing lagging. External Commercial Borrowings (ECBs) have slowed down mainly due to the higher cost of loans. Hence, while several companies have pointed to investing more, these seem, so far, to be more intention than action.
The consumption picture is also fuzzy. While there are reports of rural demand being good in FY23, the same is not reflected in the production of consumer goods. The 16 per cent growth in nominal consumption in FY23 would tantamount to just 7 per cent in real terms, as inflation has pushed up costs. And this was also brought about by pent-up demand for both goods and services post the full removal of the lockdown in 2022. Also, this was the time when households saved less — as was reflected in slow growth in deposits. Therefore, going forward, it would be interesting to see if the tempo can be maintained.
Ultimately, a growing economy needs to create more jobs if consumption and investment have to be sustained. The average unemployment rate, going by CMIE data, is around 7.5 per cent, which can now be considered the “natural” rate of unemployment in India. But the concern is more on the labour participation rate, which has been coming down – from 46.2 per cent in FY17 to 39.5 per cent in FY23. This is serious: It indicates a growing population in the working age group that is not interested in working. If one combines this with the series of layoffs in several IT/fintech companies, the picture gets darker. The promise shown by start-ups has not yet been realised and hence, they have not been job creators to the degree that was expected, given the push by the government over the years.
The bright spot in this picture is the banking sector, which has come out from the gloom that enveloped it in the second half of the last decade. The cleaning up operations as well as the slowdown in the economy, which lowered demand for credit, has helped the banks, especially those in the public sector, to emerge stronger. NPA levels have come down and banks are well-capitalised. Also, profitability has improved as control over the quality of assets has meant lower provisioning for NPAs. The implication is that as and when the economy gets into the take-off mode, banks will be well equipped to provide the funds, which would not have been the case 4-5 years ago.
The financial year began well with the government already making it clear that the budget would be prudent and that there would be no largesse even in a pre-election year. Monetary policy has taken a pause. This can be a prolonged one, based on how inflation will move in the coming months, and the views of the MPC members. The world economy would slow down, and domestic initiative has to drive the story forward. The broad numbers look statistically realistic but the triad of employment, consumption and private investment has to bear fruit.
Sabnavis is the chief economist, Bank of Baroda, and author of Banking Trends and Controversies. Views are personal
First published on: 09-05-2023 at 19:45 IST
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