India’s Economic Narrative Might Be Glowing. The Economy Isn’t.

The latest, June quarter gross domestic product (GDP) figures for fiscal year (FY) 23 delivered some much-needed grist for the BJP’s spin mills. Prima facie, the numbers look impressive and, to nobody’s surprise, the party machinery is leaving no stone unturned in trumpeting the figures as evidence that the Modi government is indeed grafting together an impressive growth narrative for India. However, the catch here is that under the window dressing of the GDP figures, the economy is unmistakably tottering and the growth trajectory since the pandemic has been ramshackle at best.

Contrasted with the 16.2% growth rate projection given by the Reserve Bank of India (RBI) and a median projection of 15.2% by economists surveyed by Reuters, the latest quarter growth rate numbers surprised everyone by coming in lower at 13.5%. A real GDP growth rate of 13.5% sounds incredible and this growth spurt can be attributed to the second wave of COVID-19 that devastated the subcontinent during the same quarter last year. Naturally, economic activity in large swathes across India took a beating and real GDP figures tanked. This made for a low base compared to which the Indian economy registered a 13.5% real GDP growth rate in the last quarter.

As for the claim of the Indian economy pipping the UK to become the fifth largest economy, the latest GDP figures might not be the best compass through this economic terrain. Consider, for a moment, the per capita GDP gulf between the two nations, which is staggeringly large and truly embarrassing for India. For the UK, per capita figure of $47,000, India’s per capita figures scrape in at barely $2,500. In any case, the GDP is a measure of income and not wealth. Reliance on GDP figures as an indicator to suggest that India’s wealth has shot up or its poverty levels have plummeted is a disingenuous ploy that massages economic statistics for the larger goal of creating a sellable narrative. India’s GDP figures could keep climbing upward but it would never be an economic indicator suggesting an equitable redistribution of wealth. The GDP figures can continue to climb higher even if the top 1% prospers at the cost of the 99%.

The credit rating agency India Ratings, in a note dated September 8, cautions against drawing glowing conclusions about the Indian economy considering the low base of FY21 and FY22. The real state of affairs is revealed once comparisons with the pre-pandemic scenario are made – and the picture that emerges is depressing.

“In the aftermath of COVID-19, the analysis of [year-on-year or YOY] growth,” the research note states, “does not provide a true picture of the economic recovery due to the low base of FY21 and FY22. Therefore, a better way to assess the recovery in GDP/gross value added is to compare the growth trend taking the pre-COVID period as a base. When done so, the GDP shows a [compound annual growth rate or CAGR] of just 1.3% during 1QFY20- 1QFY23 as against 6.2% during 1QFY17-1QFY20. Among all the sectors, the CAGR growth of the services sector shows the sharpest decline to 1.0% during 1QFY20-1QFY23 from 7.1% during 1QFY17-1QFY20, implying that the recovery in the sector is still weakest”.

If that isn’t enough bad news, account for the fact that the real wage growth in India has sunk into negative territory. With inflation wreaking havoc, every single rupee of a common man’s wages has lesser purchasing power now than a few years back.

FILE PHOTO: The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai, India, February 2, 2016. (Photo by: Danish Siddiqui/Reuters)

“The household sector which accounts for 44-45% of the GVA saw its nominal wage growth decline to 5.7% during FY17-FY21 as compared to the 8.2% growth rate recorded during FY12-FY16. This means that the wage growth in real terms is close to just about 1%. Since much of the growth in consumption demand is driven by the wage growth of the household sector, a recovery in their wage growth is going to be critical for a sustainable and durable recovery in private final consumption expenditure and overall GDP growth in FY23. Even the recent trend in wage growth at the rural and urban levels alludes to an erosion of the purchasing power of households. At the nominal level, the wage growth in urban and rural areas was 2.8% YoY and 5.5% YoY, respectively, but in real terms (adjusted for inflation) was about negative 3.7% and negative 1.6% in June 2022.” the India Ratings research note states.

In any case with the pall of inflation hanging so ominously over the global macroeconomic scene, how long could India be an outlier? India’s retail inflation, as assessed by the CPI, shot up to 7% in August from a five-month low of 6.71% recorded in July. The latest reading will further egg the central bank to follow through with the ‘new normal’ rate hike of 50 basis points (bps) in its September 2022 meeting.

According to ICRA, the early data for September 2022 shows that the average prices of potatoes, tomatoes, rice, wheat, milk, sugar and some pulses hardened in the month compared to August. Adding to inflationary concerns is the fact that total Kharif acreage for this year would have to register a handsome growth of 34% for it to match last year’s final yield, a highly unlikely prospect. Obviously, more hardships are in store for Indians.