The Depth of India's Economic Woes: A Closer Look
The recent slowdown in India's economic growth and the limited job creation have raised concerns about the country's long-term economic health. The reliance on debt and the hollowing out of the middle class are clear indicators of deeper structural issues
Indian EconomyStructural IssuesJob CreationConsumptionEconomic SlowdownReal EstateJan 20, 2025
For instance, Goods and Services Tax (GST) collections have moderated from 8.9 per cent in the second quarter to 8.3 per cent in the third quarter.
The first advance estimates, influenced by the second-quarter slump, do not offer much optimism for the next year, with many forecasting a growth rate in line with the pre-pandemic average of 6.6 per cent.
This is far from encouraging.
The government has largely blamed the Reserve Bank of India (RBI) for the cyclical slowdown, deflecting responsibility.
The RBI did contribute to the slowdown by keeping the rupee artificially strong, eroding export competitiveness, and maintaining tight monetary policies.
However, the issues are more structural and distributional, extending beyond what lower interest rates can fix.
The current rupee weakness is distinct from previous crises, such as the 2008 financial crisis or the 2013 taper tantrum.
The high growth rates post-pandemic were primarily driven by the surge in services exports, especially the boom in Global Capability Centres (GCCs).
This surge had positive knock-on effects on residential real estate, passenger vehicles, and other high-end goods and services.
However, this growth is biased towards the highly skilled, a small segment of the labor force, limiting upward mobility and broader consumption.
As the GCC boom stabilizes at lower levels, the underlying weaknesses in the economy become more evident.
Limited upward mobility has long been a feature of the Indian economy, but it has become more pronounced since the pandemic.
This is evident in the car market, particularly the low-priced small car segment, which is often a marker of middle-class status.
Data from Crisil shows that in 2014-15, the sub-Rs 10 lakh car segment accounted for 73 per cent of all car sales.
By 2019-20, this share had dropped to 65 per cent, and by 2024-25, it had plummeted to 46 per cent.
Maruti Suzuki, for instance, saw lower sales of its mini and compact cars in the first half of this year compared to 2017-18.
This indicates a lack of new buyers for low-priced small cars, reflecting the hollowing out of consumption.
Moreover, the emphasis on 'premiumisation' by the corporate sector is an acknowledgment that the overall market is not expanding rapidly, only the top consuming cohort is.
The labor market is not providing enough productive employment opportunities, and real wages are not growing fast enough.
This limits the number of people moving up the income ladder and, consequently, the growth in broader consumption demand.
Even as millions join the workforce, many are self-employed in informal establishments, such as household businesses, one-man roadside shops, or agriculture.
The expansion of informal employment indicates a lack of alternatives and productive job opportunities.
Formal employment, as per EPFO payroll data, remains concentrated in low-skill sectors like manpower suppliers, normal contractors, and security services.
The fallout of limited job creation and muted wage growth is evident in the rising household debt.
By June 2024, household debt had reached 43 per cent, with a significant portion of loans taken for consumption.
Alarmingly, about 60 per cent of those taking personal loans in the second quarter already had more than three live loans.
This trend of increasing debt, however, has not significantly boosted overall consumption.
With little demand and uncertainty over government policy, investment activity remains subdued.
New project announcements have slowed down, and Foreign Direct Investment (FDI) is below recent highs.
The corporate sector, usually reticent, is questioning the growth numbers and speaking about a shrinking middle segment, indicating a grim scenario.
While the government is urging the corporate sector to invest and take risks, the ruling dispensation, nearly 11 years into power, has not taken significant risks itself.
The shift of one of the largest business houses from the industrial sector to services suggests a growing pessimism about the economy's future.
In conclusion, the Indian economy's current challenges are deep-seated and structural, requiring comprehensive policy interventions to address the issues of job creation, wage growth, and consumption.
The focus must shift from short-term fixes to long-term solutions that enhance productivity and inclusivity.
Frequently Asked Questions
What is causing the slowdown in India's economic growth?
The slowdown is attributed to structural issues such as limited job creation, low wage growth, and a bias in growth towards highly skilled labor, which limits upward mobility and broader consumption.
How has the car market been affected by the economic slowdown?
The low-priced small car market, a marker of middle-class status, has seen a significant decline in sales, indicating a lack of new buyers and a hollowing out of consumption.
What is the role of household debt in the current economic scenario?
Household debt has risen, with a significant portion taken for consumption. However, this increase in debt has not significantly boosted overall consumption, indicating limited economic traction.
Why is investment activity remaining subdued?
Investment activity is low due to a lack of demand and uncertainty over government policy. New project announcements and FDI are below recent highs, and the corporate sector is questioning the government's growth numbers.
What long-term solutions are needed to address the economic issues?
Long-term solutions include comprehensive policy interventions to enhance productivity, create more productive job opportunities, and address issues of wage growth and consumption to ensure economic inclusivity.
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