India’s economic growth engine begins to stall

India’s economic growth engine begins to stall

Despite growing global uncertainties, India’s economy maintained its remarkable resilience in the early months of 2024. But economic projections for the 2024–2025 fiscal year show a slowing growth rate, driven primarily by depressed consumer demand. Many Indian workers have seen a decline in their real wages in the past few years and demand conditions across the Indian economy remain sluggish. India must work to formalise its economy and strengthen its manufacturing sector if it is to create greater economic opportunities for its workers.

2024 began with the Indian economy continuing to show remarkable resilience in the face of growing global uncertainties. The macroeconomic fundamentals were buoyant and India’s economy continued to be the fastest growing of the major economies, registering growth of 8.2 per cent during fiscal year 2023–24 (April–March).

But India’s growth momentum was considerably dented in the second quarter of the current fiscal year, with its economy growing at a rate of 5.4 per cent. This was the slowest growth in six quarters, almost three percentage points slower than the corresponding period of the previous fiscal year.

The slowdown of the Indian economy was confirmed by the National Statistics Office when its advance estimates of GDP for the 2024–25 fiscal year showed that the economy could grow by just 6.4 per cent, nearly two percentage points slower than in the previous year. Even though at 6.4 per cent India would continue to be the fastest growing major economy, sub-7 per cent growth does cast a shadow over India’s aspirations of joining the ranks of developed countries by 2047.

To get back on course, the Indian economy has to overcome a series of weaknesses, not the least of which is depressed consumer demand. Private consumption expenditure is the main driver of GDP, but this component has remained sluggish ever since the effect of the government stimulus packages provided during the COVID-19 pandemic wore out. Private consumption expenditure exceeded 60 per cent in several quarters between 2021–23, while in the following period it mostly remained in the mid-50 per cent range, even declining to 53 per cent in the third quarter of fiscal year 2023–24.

These trends are largely attributable to the wage squeeze suffered by India’s large informal workforce. Still, the small share of workers employed in the formal sector have also experienced a decline in their real wages over the past few years. A report prepared by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Quess Corp Ltd showed that while nominal wages across six major manufacturing and infrastructure sectors increased by 0.8–5.4 per cent, retail inflation was between 4.8 per cent and 5.7 per cent, implying either stagnant or declining real wages for Indian workers.

The cost of living may be higher than retail inflation numbers suggest. Food inflation in India was consistently much higher during this period, often close to double digits. In sharp contrast, corporate profits increased fourfold during the same period. Growth in profit-share and a reduction in the wage-share in India’s formal sector has, unsurprisingly, caused sluggish demand conditions in the Indian economy.

Data on India’s labour market dynamics available from the Periodic Labour Force Survey support the findings of the FICCI–Quess Corp report. In 2023–24, the share of workers earning a regular wage in the formal sector was just a fifth of the total workforce. Among this group, the share of workers without a written job contract was 58 per cent, while the share of workers not eligible for any specified social security benefit was 53 per cent.

Almost 80 per cent of the total workforce was employed in the informal sector, which includes self-employed and casual workers who face uncertain earnings. The government has set an objective of formalising the informal workforce and has embarked on initiatives aimed at creating employment opportunities in the manufacturing sector that would improve workers’ overall economic conditions.

India’s Production Linked Incentive (PLI) scheme is an ambitious plan to strengthen the country’s manufacturing sector by targeting 14 key sectors with high growth. The PLI scheme has delivered less than expected and the government has made several course corrections to put this key initiative back on the right track. But the employment challenge that the country faces may have to be addressed through more than just one scheme.

In 2024, concerns also emerged regarding both the current and capital accounts of India’s balance of payments. The merchandise trade deficit was nearing an all-time high during the first eight months of the current fiscal year, but this did not adversely affect the current account deficit due to higher services exports. But the capital account remains strained due to large outflows of both foreign direct investment and foreign portfolio investment.

Though FDI inflows between April–October 2024 were US$49 billion, higher than in the previous two years, divestments by foreign investors reached a high of over US$34 billion during this period. Outflows of FPI increased during the closing weeks of 2024, causing net inflows during the year to remain in negative territory. A continuation of this trend could put additional pressure on the Indian rupee, which experienced creeping depreciation towards the end of 2024, a trend that has somewhat quickened in the New Year.

Source: EastAsiaForum