It’s a question of jobs, stupid!
How is the Indian economy doing?
In terms of growth in real GDP, India is currently the fastest growing major economy in the world. For 2023-24, the estimated GDP growth rate is 7.6%, while for China it is around 5%. This is on top of 7.2% growth in 2022-23. For 2024-25, the average GDP growth forecast by various international agencies is above 6.5%.
Sceptics point out that this high growth will not be sustainable since it is occurring on the back of massive government infrastructure investment, not yet followed by a commensurate surge in private investment or consumption expenditure.
Recent data indicates, however, some resurgence in private investment as excess capacity in many industries is getting squeezed and incentives like reduction in corporate tax rates, massive PLI subsidies in several targeted industries have started to bring in new investment. Another contributory factor for FDI flow into India is the ongoing US-China strategic stand-off and the initiatives of Western powers to relocate parts of manufacturing supply chains away from China to other friendly countries.
Sceptics argue that unless consumption spending picks up, private investment cannot be sustained. For this, they blame the rising inequality in income distribution. Since the rich have lower propensity to consume than the poor, rising inequality dampens consumption expenditure. But then, inequality has been with us for decades and yet India has managed to have an average 6.5% growth rate over this period. So, heightened inequality (however undesirable otherwise) has not been a limiting factor on growth yet.
India currently has the fifth-largest GDP and is poised to become the third-largest (after the US and China) in a few years since it is growing faster than the other major economies on that path (Germany and Japan). However, we must not forget the mammoth task ahead of bridging the huge gap in per capita income between India and these countries. In fact, at present, our small neighbour Bangladesh has a higher per capita income than us.
The CPI inflation in India is hovering around 5%, which is within the RBI target band of 2-6%. Core inflation (which takes out the more volatile food and fuel from the picture) is above 3% while food inflation is at near 9%. As always, food and fuel inflation, which concerns the common people most, is largely due to factors beyond the control of the government, like weather and the geopolitical situation. Incidentally, China’s CPI inflation is below 1% which, however, is not a good sign as it indicates significant excess capacity and deficiency in demand.
On the external front, India has foreign exchange reserves of around $650 billion, adequate to finance 10 months’ imports. This guarantees some stability to the external value of rupee by RBI intervention, as needed. Current account deficit has mostly remained under the prudential limit of 2% of GDP. A stable currency, along with fiscal and financial stability is a positive factor attracting foreign investment.
The biggest concern is, though, rising unemployment, along with falling quality of jobs. To an extent, this is a global phenomenon of ‘jobless growth’ due to technology becoming more capital and skill-intensive. Even traditionally highly labour-intensive construction activities are now becoming increasingly equipment-intensive. So, even big government spending on road construction is not causing a corresponding rise in employment.
Since the quality of education and skills of most Indian workers are poor, the growth of GDP and private investment is accompanied by a shortage of workers of required skills. People unable to find good private sector jobs scramble for a dwindling number of government jobs or are forced to take up low-skill low-income jobs like couriers, delivery boys or self-employment as street-hawkers or fall back on
overcrowded family farms as agricultural workers.
India’s ‘demographic dividend’ of a high share of young people in the labour force is turning out to be a demographic nightmare, without proper skilling of workers. A recent ILO study presents data on the alarming jobs situation among the educated young people in India, which is much worse than among the uneducated. This is because education increases aspirations but inadequate quality of education/skill prevents one from getting a remunerative job while a ‘sense of pride’ does not allow such a person to take up any job like that of a delivery boy, or a farm worker.
The ratio of people below the official ‘poverty line’ has been going down, more so in the years of higher growth. Growth helps reduce poverty in two ways: by directly creating jobs, and by generating more tax revenue which enables the government to spend more on anti-poverty programmes. At the same time, 80 crore people needing free rations, the actual expenditure on NREGS exceeding budgetary allocation by more than 40%, and India’s dismal global ranking in hunger and malnutrition indexes do not present a pretty picture, alongside a booming market for super-luxury mansions, top-end cars, and Apple iPhones.
What is the significance of the ongoing stock market boom like Sensex hitting 75,000 in April 2024, relative to 50,000 in 2021 and 10,000 in 2006? First, a booming stock market is mostly the result of net buying of existing shares in the secondary market rather than the issue of new shares which represents new investment that holds the key to GDP growth. Second, Sensex consists of the top 30 companies in terms of market capitalization. So, if big corporates expand at the expense of medium and small-size firms, overall production may not increase but Sensex would go on rising. Third, in India, the participants in the stock market are mostly affluent people and more recently some young professionals investing in mutual funds through the SIP route. The low-income people are virtually absent in equity markets and depend solely on wage income, which is getting squeezed. Thus, in the prevailing Indian context, a booming stock market cannot be a reliable indicator of either real growth or a wider distribution of wealth. In fact, in the Covid years, Sensex was booming, despite (big) negative GDP growth.
To conclude, both India and China -- two of the fastest growing economies in recent times – have been able to pull millions above poverty but at the cost of sharply rising income and wealth inequality, despite the huge difference in the political systems of these two countries. It indicates that economic forces in a market system which establish a positive link between GDP growth and poverty reduction also cause rising inequality. Political system or ‘cronyism’ plays a secondary role.
(The writer is a former Professor of Economics, IIM Calcutta, and Cornell University, US)
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