Unshackling the vicious chain

India’s Finance Minister Nirmala Sitharaman is expected to present the annual budget for the remaining few months of the current financial year 2024-25 early next week. It is anticipated that this time she will release the annual Economic Survey which was not distributed in February when she presented the interim budget before the general election.

The condition of the Indian economy is grave. Rosy future projections about the world’s 5th largest economy, based on GDP growth rates, do not sound convincing anymore to millions of unemployed and hungry citizens. People have also realised that a huge part of the GDP growth rate is due to the high rate of indirect tax collection in the form of GST which is very regressive by nature. The growth of the other component of GDP, the gross value addition (GVA), is not very promising. In addition to this, reductions in the government subsidies also make GDP growth figures look very attractive. But higher rates of indirect tax collection, coupled with reduced government subsidies, has made the economic condition of millions of Indians very difficult. An analysis of the recently released Household Consumption Expenditure Survey (HCES) by Hindustan Times reveals that in 2022-23, over 43 per cent Indians had to skip either breakfast, lunch or dinner. They could not afford more than two meals a day.

Fragile economy

As the Finance Minister of a coalition government, Mrs Sitharaman will face the overwhelming task of addressing quite a few basic economic issues for which her government’s erroneous policies during the last decade, like demonetisation, introduction of regressive indirect tax in GST, faulty direct tax policy, improper handling of the COVID-19 pandemic, are blamed.

In a report published in April 2020, ILO estimated that due to mishandling of the COVID-19 pandemic, during its first phase alone, around 40 crore informal sector workers in India were pushed into deeper poverty, with the lockdown and other containment measures affecting jobs and earnings as well. According to ILO, India was among the countries less equipped to handle the situation. The first phase of lockdown measures in India, which were at the high end of the ‘University of Oxford's COVID-19 Government Response Stringency Index’, have impacted these workers significantly, forcing many of them to return to rural areas.

Here are a few challenges the Indian economy is facing at present which need urgent intervention by the government.

Growing unemployment: According to data from the Centre for Monitoring Indian Economy (CMIE), the unemployment rate rose to an eight-month high of 9.2 per cent in June 2024, up from 7 per cent in the previous month. It was 8.5 per cent in June 2023. The female unemployment rate was higher than the national average at 18.5 per cent in June 2024 compared to 15.1 per cent in the same month last year. The male unemployment rate stood at 7.8 per cent compared to 7.7 per cent in the same month last year. The unemployment rate measures the number of people who are unemployed and actively looking for a job among those in the labour force.

For years, India has been doing very poorly in terms of employment generation. It is not a new development. Even before the COVID 19 pandemic, India’s youth unemployment had been rising every year for a long time, and in 2019, it reached the level of 23 per cent which was comparable to unemployment rates in countries like Yemen and Iraq that handled long years of deeply troubled economy due to war and internal conflicts.

Rising inflation: The annual consumer inflation rate in India rose to 5.08 per cent in June 2024 from 4.75 per cent in the previous month, well above market expectations of 4.80 per cent to reflect the fastest pace of price growth since February. Prices accelerated steeply for food (9.36 per cent vs. 8.69 per cent in May), which is responsible for nearly half of the weight of the Indian consumer basket, as higher energy prices and uncertain weather conditions lifted costs for keeping crops, reports MoneyControl.

Indian households spent 18 per cent more in the March quarter of 2024 than in the June quarter of 2022, on account of rising inflation, market research firm Kantar said. The report also reveals that in 2024-25, 34 per cent households reported that they were finding it difficult to manage their expenses—indicating a third of India is still under severe financial stress.

Shrinking informal sector: Informal economy thrives mostly in a context of high unemployment, underemployment, poverty, gender inequality and precarious work. The situation is aggravated in conflict-affected and fragile conditions where there is no other alternative than operating in the informal economy for securing livelihoods. Beyond a high incidence of poverty, informal economies are also characterised by decent work deficits. Low-quality employment, inadequate social protection, poor governance and low productivity are some of the obstacles that workers and enterprises face when caught in the informal trap. Without formalisation, decent work for all and equity in society will remain an illusion. The informal economy comprises more than half of the global labour force and more than 90 per cent of Micro and Small Enterprises (MSEs) worldwide. Informality is an important characteristic of labour markets in the world, with millions of economic units operating and hundreds of millions of workers pursuing their livelihoods in conditions of informality. These enterprises are not usually incorporated as companies. These include small businesses which may be sole proprietorship firms or partnership firms, and also vendors and hawkers.

The National Sample Survey Organisation’s Annual Survey of Unincorporated Sector Enterprises (ASUSE) for 2021-22 and 2022-23 reveals that India’s 65 million informal or unincorporated sector enterprises employed 110 million workers in 2022-23. These enterprises cumulatively created a gross value added (GVA) worth 15.4 lakh crore. The GVA and employment share of the informal sector outside of agriculture, therefore, accounts for 6 per cent and 19 per cent respectively.

The survey of unincorporated sector enterprises (USE) was earlier conducted once in five years, with the last being in 2015-2016. A brief comparison between USE 2015 and ASUSE 2022-23 reveal that:

• While GVA by the sector increased at over 7 per cent per annum in real terms between 2010-11 and 2015-16, it contracted by about 0.5 per cent per annum between 2015-16 and 2022-23. The number of USEs increased from 5.77 crore in 2010-11 to 6.34 crore in 2015-16, but then to only 6.5 crore in 2022-23 (with a dip to 5.97 crore in 2021-22).
• Although the number of USEs in 2022-23 is slightly higher than in 2015-16, the GVA per enterprise in 2022-23 at Rs 2.38 lakhs compared to Rs 1.82 lakhs in 2015-16 represents a decline in real terms.
• The total estimated number of workers in the USEs has been reduced in absolute terms, from 11.13 crore workers in 2015-16 to 10.96 crore workers in 2022-23.
• Over 85 per cent of the USEs are own account enterprises (OAEs) and only the remaining 15 per cent are hired worker establishments (HWEs). The GVA per OAE was only Rs 1.27 lakhs in 2022-23, i.e., these enterprises were making hardly Rs 10,000 a month.
• The hired workers’ emoluments on average have also fallen slightly in real terms in 2022-23 compared to 2015-16. In 2022-23, hired workers in HWEs on average received Rs 1.25 lakhs annually.

Informal sector enterprises have been a defining feature of the Indian economy. While activities like agriculture, fisheries, and livestock in the primary sector remain predominantly household-based informal enterprises, a large segment of non-agricultural activities are also in the informal or unorganised sector. According to two reports by the National Sample Survey Office (NSSO), called the Annual Survey on Unincorporated Sector Enterprises (ASUSE), for 2021-22 and 2022-23, 13 out of 18 Indian states and three union territories saw declining number of workers in the informal sector of the economy, from the year 2015-16 to 2022-23.

Persisting inequality in household consumption expenditure: Preliminary findings of the Household Consumption Expenditure Survey (HCES) 2022-23 have been released recently, by the Union Government, after a gap of eleven years. The latest report showed that while the average MPCE (monthly per capita consumption expenditure) in urban households rose to Rs 3,510 – an increase by 33.5 per cent since 2011-12 – and rural households to Rs 2008, i.e., a 40-42 per cent uptick, the jump is more owing to steep inflationary trends than any real rise in incomes, writes The Wire. “The bottom 5 per cent of India’s rural population, ranked by MPCE, has an average MPCE of Rs 1,373 while it is Rs 2,001 for the same category of population in the urban areas. The top 5 per cent of India’s rural and urban population, ranked by MPCE, has an average MPCE of Rs 10,501 and Rs 20,824, respectively,” a factsheet on the findings of the survey revealed.

The survey also revealed that the proportion of spending on food slid to 46.4 per cent from 52.9 per cent in 2011-12 in rural households, while it dropped from 42.6 per cent to 39.2 per cent in the corresponding period for urban households. The figure could imply that people may be cutting down on spending on food because of high retail inflation, or have been relieved by the government’s free ration scheme to 80 crore Indians.

Gated stagflation due to growing inequality: Despite a GDP growth rate of 8 per cent for FY24, domestic consumption growth remained sluggish at 4 per cent. Severe Income inequality helped the wealthiest 20 per cent accumulate 92 per cent of the country's savings. Economists estimate that the top 20 per cent of Indians are growing their income by around 10-11 per cent and the other 80 per cent is growing by about 4 per cent. It is feared that with real SENSEX and gold price growth at 20 per cent and 13 per cent, respectively, and agriculture growth of 1.4 per cent, it’s even possible that the top 5 per cent of Indians are growing income at 15-18 per cent and bottom 20 per cent are not growing at all. According to noted economist Kaushik Basu, this has led to ‘gated stagflation’ in India.

Prof Basu says that India is facing an unusual situation, which could be described as 'gated stagflation’ whereby the well-off are doing fine but the stagflation is confined to the middle and lower-middle classes. Since stagflation refers to inflation combined with negative growth in the whole nation, India is not in stagflation. But the bottom 4/5th of India is clearly caught in stagflation. This is a novel phenomenon and needs to be analysed and dissected in order to devise policies directed at curing India’s crisis of gated stagflation, suggests the economist.

Falling private investment: Economists are of the opinion that the decline in private investment (as measured by private Gross Fixed Capital Formation (GFCF), as a percentage of gross domestic product (GDP) at current prices, has been one of the major issues plaguing the Indian economy. Private investment has witnessed a steady decline since 2011-12, and the government has been hoping that large Indian corporations would step in and ramp up investment. In 2019, the Union Government slashed corporate taxes from 30 per cent to 22 per cent, hoping that the move would encourage private investment. Recently, it has also announced various Production Linked Incentives (PLI) schemes to boost the manufacturing sector. But all these incentives have failed to motivate private investors, maybe due to low consumption demand.

Private investment began to pick up in India mostly after the economic reforms of the late 1980s and the early 1990s, which improved private sector confidence. It rose from around 10 per cent of GDP in the 1980s to around 27 per cent in 2007-08. From 2011-12 onwards, however, private investment began to drop and hit a low of 19.6 per cent of the GDP in 2020-21., writes The Hindu.

It is reported that in an exceptionally slow start to private capex in this financial year, new investment plans in the country slumped to a 20-year low in the April to June quarter, with just Rs 44,300 crore of fresh outlays announced by corporates. Compared to this, the first quarter of 2023-24 had recorded new investment announcements of nearly Rs 7.9 lakh crore. Though one may argue that corporate houses adopted a wait-and-watch approach amid the 2024 Lok Sabha elections, this tally is far lower than the same quarter over the past two general elections held in 2014 and 2019. New investment plans in Q1 of 2014-15 were at Rs 2.9 lakh crore, while they added up to Rs 2.1 lakh crore in Q1 of 2019-20.

FDI flow has also declined in recent months. As per RBI data , foreign direct investment (FDI) equity inflows in India decreased by 3.49 per cent in FY24 to USD 44.42 billion. In FY23, FDI equity inflow was recorded at USD 46.03 billion. This is the second consecutive year of FDI decline as equity inflows had declined by 22 per cent in FY23 compared to FY22 when India received a record high of USD 84.83 billion in FDI inflows. The manufacturing sector received USD 9.3 billion FDI in FY24, which was 17.7 per cent less than the USD 11.3 billion inflows in FY23—one of the lowest in the past five years. In FY22, the manufacturing sector received USD 16.3 billion in FDI.

Shrinking labour productivity: An analysis of the latest KLEMS (Capital, Labour, Energy, Material and Service) database released by the Reserve Bank of India (RBI) reveals that nine out of 27 industries saw their labour productivity contract in FY23 compared to the preceding year, with eight of these industries belonging to the manufacturing sector, thus highlighting India’s lack of competitiveness in industrial sectors.

Observations

The Indian economy has fallen into the vicious circle of poverty. Extreme disparity in wealth and income distribution has pushed the economy in a state of ‘gated stagflation’. To break this deadlock, the Finance Minister must resort to the Keynesian prescription of boosting aggregate demand by allocating more government funds for the social sector and targeted welfare programmes like Mahatma Gandhi National Rural Employment Guarantee Scheme. Increased government spending will boost household consumption which will stimulate private investment.

A more appropriate fiscal policy is urgently needed for the reduction of economic inequality and for mobilising funds for welfare schemes. Neo-liberal economy and its trickle down philosophy of GDP-centric economic growth model has failed.

Views expressed are personal