Successive years of rapid economic growth have encouraged commentators to suggest that the economy may at long last be on a higher growth track. This is because growth in the last five financial years (2021-26), taking into account the advance estimates for the current year, averages a handsome 8.1 per cent—the best on record.
But this number should be seen in context. The latest five-year record is on the back of a depressed base, because the economy had shrunk in the Covid year, 2020-21. If one takes the pre-Covid year (2019-20) as the base, growth in the latest six years has averaged a less flattering 5.7 per cent. That is slower than the growth record of the previous 19 years, from the turn of the century to the pre-Covid year, a period that averaged 6.5 per cent growth.
The key question is how much of the latest growth record represents recovery from the 2020-21 downturn, and what is the sustainable growth rate now. Some published growth forecasts for next year hover around the 6.5 per cent level. On that basis, looking at the three-year cycle (2024-27), growth would average 6.8 per cent. That is the same as in the first term of the Modi government. This suggests that there is as yet no marked increase in the sustainable growth rate.
Going beyond the headline growth numbers (which in any case raise questions about data quality), one needs to look at several other numbers to understand the economic situation. For, at most times in earlier periods, one or other economic indicator was often out of kilter. Either inflation was high, or the trade deficit was large, as was the fiscal deficit, or banks and companies had troubled balance sheets. In contrast, the economy today has been characterised as being in a Goldilocks phase, with low inflation, balanced trade, a reduced fiscal deficit, and with bank and corporate balance sheets in their best-ever shape.
Yet key macro numbers suggest caution. The fiscal deficit at 4.4 per cent of GDP, while on a declining trend, is higher than the average for the first Modi government (3.6 per cent)—perhaps because of an investment push and also reflecting more honest accounting! But public debt too remains high, though on a declining trend. At 81 per cent of GDP, it does not provide headroom for counter-cyclical fiscal action if the economy suffers a downturn. Meanwhile, savings and investment rates (critical for growth) are lower than earlier. Gross fixed capital formation has been put at 30 per cent of GDP for the current year. This is lower than the average of 34 per cent for eight years to 2012-13. The number dipped below 30 per cent in 2015-16 before going back over that threshold in 2022-23. Meanwhile, the share of merchandise exports in economic activity has reduced over time. That is usually a contra-indicator for faster growth.
If one wants data to support a growth-ascendant narrative, one has to look to other numbers. Critically, the country may transition in the current year from the “medium” to the “high” category on the United Nations’ human development index, having progressed from the low to medium category two decades ago. This reflects sustained improvement in education levels, life expectancy and incomes, but note that there is also a “very high” index category that encompasses over 70 countries.
When it comes to economic management, tax rates (corporate tax, income tax, GST) are now more reasonable than before. The digital public infrastructure that has been put in place and gained wide usage should improve system-wide productivity. So too should the massive investment in physical infrastructure, which has speeded up goods movement on both road and rail (though paradoxically it has negatively affected the sales of commercial vehicles!). Many sectors have benefited from reform, like real estate; and manufacturing may at last be getting some momentum, led by the electronics sector. The recent free trade agreements should also yield some benefits down the road.
The structural constraint most frequently mentioned is consumption, whose sluggish growth has held back private corporate investment (capital goods output has grown the slowest among industrial segments). The good news at the bottom of the income ladder is that there has been a sharp drop in the absolute poverty numbers, but this may not translate into much consumer demand, especially since employment has shifted towards rather than away from an already over-populated agriculture.
Higher up the income ladder, consumer debt is at a high point. Household financial liabilities doubled in the two years to 2023-24, from Rs 8.99 trillion to Rs 18.79 trillion. These liabilities used to be about a quarter of household financial savings; that ratio has gone up to a third. This will weigh against future consumption growth because of the pre-emption of income streams by loan repayment obligations. Already, there is slower growth in many sectors. Railway passenger traffic in particular has been on a slow track, with net passenger kilometres showing virtually no growth over a full decade (despite the proliferation of Vande Bharat trains).
One is not surprised therefore when the chief executive of a leading consumer goods company tells an interviewer that he is focused on the top 20 per cent of consumers because that is where the growth is. But even airline traffic grew only 11 per cent over five years to 2024. The surge in the number of airports is a poor indicator of aviation activity.
The underlying issue is that there hasn’t been enough of a structural change in the economy since the launch of reforms in 1990-91, despite per capita incomes multiplying nearly five-fold. Industry accounted for a quarter of GDP then, as it does now. The share of agriculture has declined, with crop yields in many cases well below world standards (necessitating a high level of tariff protection, bedeviling trade negotiations). The service sector has become the largest chunk of the economy, but much of it remains in the unorganised part of the economy. Gig employment is not a substitute for proper jobs.
A productivity uptick depends critically on three structural changes that are yet to happen: A substantially bigger manufacturing sector, greater formalisation of the economy, and rapid urbanisation. There is as yet not enough evidence of any of the three. If anything, urbanisation may have slowed down. While many things have improved in recent years, much work remains to be done before the economy can gain significant momentum.
TN Ninan is a former editor of Business Standard. Views are personal.