The new government coming to power after results are announced on 23 May could face a challenging time on the economic front, as the world’s fastest growing major economy sputters and begins to show signs of heading for a slowdown.
Despite relatively strong economic growth figures in the last few years, growth is showing signs of faltering. Economic growth slowed to 6.6 percent in the last quarter of 2018, which was the lowest growth rate within a span of the last six quarters.
Meanwhile, consumer spending on cars and SUV have dropped to a seven-year low, passenger growth in the world’s fastest growing aviation market expanded at the slowest pace in nearly six years and credit demand has been dull. Companies making fast moving consumer goods (FMCG) have reported revenue growths of less than 10 percent, with over 334 companies reporting net profits slumps of over 18 percent year-on-year.
According to Kaushik Basu, former chief economist of the World Bank and professor of economics at Cornell University, India’s rapid growth has been essentially powered by its top 100 million citizens. The leading indicators of economic prosperity, he says, are things that these Indians consume — cars, SUVs, two-wheelers, air conditioners and so on. Having had their fill of home-made goods, they have now moved to imported luxuries — foreign holidays and Italian kitchens, for example.
Analyst believe the demand contraction could be the result of a fall in both urban and rural incomes. A crop glut has seen farm incomes drop. And credit stagnation, partly triggered by the collapse of a major non-banking financial institution, or a shadow bank, has led to a fall in lending and worsened matters.
Obviously, in a country of 1.34 billion people, the less than 8 percent that constitute the top 100 million cannot sustain economic growth for long. The drive has to come from the meeting the needs of the remaining majority of Indians, who mostly want the basics of a decent life: nutritious food, affordable clothing and housing, access to good health services and education. India should be striving to produce what the majority of Indians want to consume efficiently, at affordable prices and in a sustainable manner; this should really be the leading indicators of economic growth, says Dr. Roy.
Rather than plan and implement realistic strategies, political parties make grand electoral promises of minimum income schemes, subsidies and other largesse to the poor. The fact that subsidies and income support cannot pay for consumption by the majority and on the massive scale that is needed to spur economic growth, escapes most people.
Rhetoric about providing a minimum income of Rs12,000 per month to just 20 percent of the population would not only be unfair, it would cost the exchequer a whooping Rs3.6 trillion annually — this figure would amount to 13 percent of total government expenditures in the 2018-2019 central budget. Pragmatic promise?, no; a voter-getter, probably. It is regrettable that promises that do not need to be kept comes easily to our politicians.
Another major disappointment according to analysts in the Indian economic growth story has been the anemic exports. Export growth has been close to zero for the last five years. “For a low-wage economy like India, a little policy professionalism — a combination of monetary policy and micro incentives — is all that is needed to grow this sector. It is regrettable that the rhetoric was not backed up with policy design,” said Dr. Roy.
Unless India is able to do this in the next decade or so, Dr. Roy believes, it is headed for what economists call a “middle income trap”, when a country stops being able to achieve rapid growth easily and compete with advanced economies. Dr. Roy explains that the classic middle-income trap means that the rich are taxed to provide minimum services to the poor, who will be kept from extreme poverty and vulnerability by using such taxes to subsidize their existence, including an universal basic income in perpetuity.
Another problem is that once a country is stuck in a middle income trap it is difficult to get out. According to a World Bank study out of the 101 middle-income countries in 1960, some 13 had become high-income by 2008 based on per capita income relative to the US. Only three of the 13 countries have a population of more than 25 million. For India, a lower-middle income economy with a population of 1.34 billion, and to get caught in a trap at this stage will be tragic.