With all of its engines only trundling along and not really hitting high gear, the Indian economy is set to see a new persistent ‘Hindu rate of growth’ of 6.5 – 7 per cent, unless some painful reforms are carried out at the central and state levels.
The original ‘Hindu rate of growth’ — a term coined by the late economist Raj Krishna in 1978 — was meant to capture the persistence of a low rate of growth accompanied by low per capita income. At the time, that low rate of growth was pegged at around 3.5 – 4 per cent.
The new, current ‘Hindu rate of growth’ is far faster than that, but is still wholly inadequate to cater to the needs of the population. It’s through faster growth that jobs can be created, incomes increased, and standards of living improved.
The reason why India is not likely to exceed this new ‘Hindu rate’ is that each of its engines of growth — consumption, investment, exports, and government expenditure — are all running at their basic levels. That is, none of them are outperforming, and aren’t expected to in the medium term.
Signs of weakness
Let’s start with consumption. Rural consumption has been subdued ever since the pandemic, and only saw a pickup in the first quarter of the current financial year. Economists and ratings agencies expect this recovery to continue through the rest of this year, driven by a normal monsoon.
But, the thing is, a normal monsoon is no guarantee in any year. The next might see a poor monsoon, with a recurrence of heat waves, the impact of which was only somewhat mitigated this year due to the rains. If the monsoon fails next year, expect rural demand to again plummet.
An engine pegged to the vagaries of weather — especially when it is becoming increasingly erratic and extreme — is not going to drive strong overall growth.
Urban consumption is following the opposite trajectory. Having surged in the last few years, it is now slumping. As even the Ministry of Finance pointed out in its latest monthly economic report, urban consumption is showing “some signs of weakness, evident in the decline in automobile sales in the first five months of the current financial year compared to the same period last year”.
It’s not just cars. As ThePrint reported last month, urban consumers are opting for smaller packs of fast-moving consumer goods (FMCG), be it shampoos or biscuits, and are buying less of them. As a result, FMCG companies are feeling the pinch.
The reason isn’t hard to see. Jobs are scarce and salary growth has not matched inflation in any meaningful way. There’s simply less money left for discretionary spending.
What this subdued and erratic demand has meant is that companies aren’t falling over themselves to invest in new capacity. The Reserve Bank of India’s capacity utilisation survey — a measure of how extensively companies are using their current capacity — shows the figure has been hovering around the 75 – 76 per cent mark for several quarters now.
Ordinarily, when demand is strong, it’s at this level of capacity utilisation that companies begin investing in fresh capacity. But this isn’t happening. After a surge in 2022-23, the private sector’s investment intentions — as measured by new project announcements — have again fallen. Research by Axis Bank shows corporate India is using its cash to pare its debt rather than invest in any big way.
This makes sense. With interest rates persistently high, debt has become quite expensive. So, in the absence of a convincing reason to increase investments, companies are reducing their debt and thereby their interest burden.
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The ‘unsexy’ sectors
The manufacturing sector has grown over the last 10 years, certainly, but even the concentrated push of the ‘Make in India’ campaign hasn’t accelerated its growth to a level faster than the growth of the overall economy. In other words, other sectors such as services have outpaced manufacturing without receiving any special attention.
Problematically, the manufacturing sector has also not been able to increase its share in overall employment. Nor have exports grown as a share of GDP in the last decade. Yet, if you ask the central government or its supporters about any of this, you’ll be confronted with much chest-thumping about the strong growth of our electronics manufacturing and exports.
The World Bank’s latest India Development Update squares this circle. India’s exports are relatively concentrated in goods and services that tend not to be labour-intensive, it said, adding that the country’s share in labour-intensive exports has in fact fallen.
Here’s where the central and state governments need to step in with painful reforms. Yes, the electronic goods manufacturing sub-sector has certainly taken off, and this bodes well for India and the Centre, which can boast about the likes of Apple increasingly preferring India. But the fact is, this isn’t nearly enough.
India needs to also concentrate on the relatively ‘unsexy’ labour-intensive sectors — such as textiles, apparel, and footwear, for example — for its growth. We can’t be docile about the increasing share in these markets that relatively tiny economies like Bangladesh and Vietnam are being able to corner.
State governments need to get on board with land and labour reforms, both of which the Centre has been trying to push. This might be politically painful, but it must be done. There’s no other way companies — burnt repeatedly by India’s regulations — will think about really investing in the country.
The toughest part in all of this will likely be curbing the bureaucracy’s discretionary powers. But this, too, must happen, sooner rather than later.
The strong growth the economy saw over the last few years had been driven by central government spending. This was essential during the post-Covid recovery period, but the government has now rightly indicated that it can’t indefinitely keep increasing its capital expenditure at break-neck speed. It has deficit targets to meet, and other spending to prioritise.
A large part of the private investment that had been happening over the last few years was in the sectors that stood to benefit from this government push, such as cement, steel, and construction. As the government eases up on its capex push, investment by these private companies will also likely slow down.
When he postulated his ‘Hindu rate of growth’, Krishna said it was based on the socialist policies of the government at the time, and assumed that policymakers were “satisfied” with 3.5 – 4 per cent growth.
As ThePrint has shown before, India is a very large welfare state even now. But we cannot be satisfied with just 6.5 – 7 per cent growth. Bullets are going to have to be bitten, bitter pills swallowed, and hard decisions taken. Short of that, we’ll have to reconcile ourselves to this new ‘Hindu rate of growth’.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.