How weak consumption growth is holding back the Indian economy's potential
Economists say that at a time when consumption growth remains subdued and the government sets itself up for fiscal consolidation, exports could propel growth.
Ashlesh (who goes by only one name) —34-year-old former data entry operator at a small firm in Ghaziabad, and originally from the village of Ambar Nagar in Balrampur, in Uttar Pradesh — immediately wanted to make it big in life the day after he had lost his job. The year was 2018 — India’s economy was still a few months away from entering a period of slowdown and, while global growth moderated, India had retained the crown for the fastest-growing major economy with its gross domestic product growing by 6.8%.
For an economic migrant in India’s growing cities, life could be a daily struggle — even for averagely skilled workers like Ashlesh who lodge themselves at the bottom rungs of the country’s tiny formal sector. “Salary was low ( ₹15000); there was pressure to save more and send money back home and the rent was so high,” Ashlesh said. When the firm shuttered, he decided to return to Balrampur and set up a small grocery store — “being one’s own boss is the starting point for making it big in life”, he said. After the economic slowdown in 2019, after the economic shocks of the Covid-19 pandemic in 2020 and 2021, and after a stellar economic recovery when growth has returned to robust rates, Ashlesh’s grocery store remains open for business.
But business hasn’t taken off — the sale of everyday goods such as milk, talcum powder, vegetables, comb, hair oil, soap, shampoo, door mats, snacks and footwear is tepid. ‘As if there is no effect of the high growth here,” Ashlesh said, echoing concerns shared by Amit Syngle, managing director and chief executive officer of Asian Paints, who in May this year told investors that his company was working toward “finding the real GDP [growth]” owing to the country’s headline growth numbers failing to correlate with growth in core sectors such as steel, cement and paints.
Year after year, on average, about 57% of India’s GDP growth is powered by private consumption — the more people and households spend on goods and services in the country, the more the GDP grows. However, in the fiscal year 2023-2024, while India’s GDP grew by 8.2%, consumption growth was weak, growing at about only 4%, a trend that is evident in frosty sales of two-wheelers and fast-moving consumer goods, especially in rural markets.
Even as recorded growth has been high, there are concerns regarding the drivers of the growth.
In June 2024, Ashima Goyal, a member of the Reserve Bank of India’s (RBI) monetary policy committee, warned that weak consumption could slow down economic growth, which she said remains below potential. And Jahangir Aziz, head of emerging market economics at JP Morgan, recently told CNBC that “public infrastructure and services exports” were the only drivers of growth [in India], with investment and consumption falling behind.
“Why do you expect consumption to be high when non-farm jobs growth has dramatically slowed and real wages have been stagnant in sectors such as agriculture, manufacturing and construction? The government needs to recognise that there is a genuine crisis of jobs in the economy. If non-farm jobs do not grow then workers will not be pulled out of agriculture,” Santosh Mehrotra, visiting professor at the Centre for Development Studies at the University of Bath in the UK, said.
Can exports really power India's economic engine when other growth drivers are slacking?
Josh Felman, principal at Washington D.C.-based JH Consulting, who also led the International Monetary Fund’s (IMF) India office in the mid-2000s, said that there are reasons to worry about consumption, meaning that growth prospects would depend on the other major components of aggregate demand, investment and exports.
According to Felman, prospects for consumption in the Indian economy depend on three factors: traditional economy such as agriculture and traditional manufacturing that cater to rural demand; new economy such as the export-oriented services sector; and the financial sector.
“It is difficult to see the traditional economy reviving in the near term. It doesn't look like we will see a bumper agricultural harvest, while the informal sector is still limping along after the triple shock of demonetisation, Goods and Services Tax (GST), and Covid-19,” Felman said. “Two years ago, service exports boomed, which in turn triggered a boom in the sale of SUVs and the construction of flats, offices, and shopping malls, as the workers in that sector started to spend their new-found incomes. But this boom now seems to have peaked.”
“Consumption prospects also depend on what is happening in the financial sector. Retail loans have been growing rapidly, as people in the new economy borrow to finance their acquisition of flats and SUVs. And rising stock market prices have encouraged people to spend a part of their new-found wealth. But credit and stock market booms always end, at which point the new economy households will need to reign in their spending,” Felman said.
In the first budget presented by the newly installed NDA government, finance minister Nirmala Sitharaman announced that the government would spend 11.11 trillion rupees on infrastructure — the same as announced in the interim budget before the national elections. While government spending on infrastructure has been one of the drivers propelling economic growth in India, private-sector investment has stagnated. Economists say that there is a limit to government spending as it sets itself up for fiscal consolidation.
“New project announcements in the June quarter [of 2024] were the lowest in twenty years, according to data from the Centre for Monitoring Indian Economy (CMIE). Part of the problem is temporary, in that some firms postponed their announcements while they waited for the results of the general elections. But there are also fundamental issues: capacity utilisation is stuck in the seventies, there is no sign of robust demand in the traditional economy, and there's no clear trend of foreign firms shifting to India,” Felman said.
For instance, in the second quarter of 2023, when India’s GDP grew by 8.1%, new project announcements — such as factories — by the private sector declined by 79%.
Prime Minister Narendra Modi has set the country on an ambitious timeline — to become Viksit, or developed, by 2047. Duvvuri Subbarao, former RBI governor, said in a recent interview that to achieve this target India would “need to grow at about 7.6% or 7.7% consistently for the next 23 to 24 years.” But he also cautioned that “India has never ever clocked growth of over 7.5% for three consecutive years.” China achieved a rare feat in economic history by managing an annual GDP growth averaging more than 9.5% over 30 years.
Mehrotra said that in the event that consumption growth doesn’t take off as anticipated, “the government could look at exports as its driving economic model.” However, according to Mehrotra, doing so won't suffice. “In the best case scenario, in the more than 30 years since economic reforms began, exports-to-GDP has never exceeded 25%, and in the last few years, this has actually come down,” he said, calling on government policymakers to refocus industrial policy on small and medium-sized industries and labour-intensive sectors.
Yet, even as global demand remains tepid, India could successfully position itself as a manufacturing hub, which would help drive its economic growth, according to Felman. “Firms want to shift their global manufacturing out of China and they are looking for a place to go. That place could be India; it should be India. But clearly more needs to be done to convince them. Subsidies through the Production-Linked Incentive (PLI) scheme are clearly not enough.”
Felman said that the government must ensure that firms have access to low-cost supplies by reducing tariffs to the levels of India's Asian competitors and eliminating local sourcing requirements so that global firms are not stuck with either inferior products or products that are too expensive. “India has plenty of scope to expand its [global] market share [in exports]. In fact, there's a historic opportunity to do so.”
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