Mohan Guruswamy | The loss of momentum in India’s economic growth

The Covid-19 shock has hit all world economies and has caused a serious contraction in all of them. In India, Covid-19 exposed our co-morbidities and has further opened up the traditional fault lines, with the large unorganised labour cohort bearing the brunt of the costs. The Indian economy, which has been in distress for most of the last decade, is now seriously stricken.

When India’s economic history is written in future, and when a serious examination is done of when India lost its way to its “tryst with destiny”, the decade of 2010-2020 will be highlighted. The facts speak for themselves. India’s real gross domestic product (GDP) growth was at its peak in March 2010 when it scaled 13.3 per cent. The nominal GDP at that point was over 16.1 per cent. The nominal GDP in September 2019 was at 6.3 per cent, the lowest in the decade. Since then, the downward trend is evident and we are now scraping the bottom at about a real GDP growth rate of 4.5 per cent, this too with the push of an arguably inflationary methodology.

The decline in the growth promise of the country is amply evident from the change in the make-up of the economy during this decade. In 2010, agriculture contributed 17.5 per cent of GDP, while industry contributed 30.2 per cent and services 45.4 per cent. In 2019, that has become 15.6 per cent, 26.5 per cent and 48.5 per cent respectively. The share of industry has been sliding. This is the typical profile of a post-industrial economy. The irony of India becoming post-industrial without having been industrialised must not be missed.

The most significant cause for the decline of growth is the decline in capital investment. It was 39.8 per cent of GDP in 2010 and is now a good 10 per cent lower. Clearly, without an increase of capital investment one cannot hope for more industrialisation, and hence higher growth. What we have seen in this decade is a huge increase in services, which now mostly means an increase in public administration and informal service providers such as pakora sellers.

The turn of the century, when China’s GDP began its great leap forward (from about $1.2 trillion in 2010 to $14.2 trillion in 2019), was also a heady moment for India whose GDP of $470 billion began a break free from the sub-5 per cent level of most of the 1990s to the rates we became familiar with in the previous decade. At that pace, if growth rates kept creeping up, GDP could have conceivably gone past $30 trillion by 2050. But for that the growth rate was required to be consistently above seven per cent. In 2010, it seemed we were well on track. But now we are struggling to get past $3 trillion, and the $5 trillion rendezvous Prime Minister Narendra Modi promised by 2024 will have to wait longer.

To be fair to Mr Modi and the National Democratic Alliance (NDA), the decline began early in the second term of the United Progressive Alliance (UPA) government, when capital expenditure growth had begun tapering off. Dr Manmohan Singh is too canny an economist to have missed that. But UPA-2 also coincided with the increasing assertion of populist tendencies encouraged by Congress president Sonia Gandhi and her extra-constitutional National Advisory Council. The decline in the share of capital expenditure was accompanied by a huge expansion in subsidies, most of them unmerited.

Instead of increased expenditure in education and healthcare, we saw a huge expansion in subsidies, such as on liquefied petroleum gas (LPG) and motor fuels, to the middle and upper classes; and fertiliser subsidies, which mainly flow to middle and large farmers with irrigated farmlands. Clearly, the money for this came from the reduction in capital expenditure.

Mr Modi’s fault in the years since 2014 has been that he did nothing to reverse the trend and only inflicted more hardship through his foolish demonetisation policy which cost us almost three per cent of GDP.

The realities are indeed stark. The savings/GDP ratio has been in a declining trend since 2011 and Mr Modi has been unable to reverse it. The drivers of economic growth such as capital expenditure are dismal. Projects funded by banks had declined by over half since 2014 to less than Rs 600 billion in 2018-2019. Subsequently, the manufacturing-GDP ratio is now at 15 per cent. The corporate profits-GDP ratio is now at a 15-year-old low of about 2.7 per cent. You cannot have adequate job creation if these ratios are dipping.

An Oxfam study revealed that as much as 73 per cent of the growth in the last five years accrued to just one per cent of the population. This does not mean that it is just the business tycoons of Mumbai and the political tycoons of Delhi who are cornering the gains. The government now employs close to 25 million persons, and they have now become part of a high-income enclave. The number of persons in the private and organised sector is about another 10 million. In all this high-income enclave numbers not more than 175-200 million (at five per family). Much of the consumption we tend to laud is restricted to just these.

Agriculture is still the mainstay of employment. Way back in 1880, the Indian Famine Commission “had observed that India had too many people cultivating too little land’. This encapsulates the current situation as well. While as a percentage the numbers of farmers and farmworkers have reduced as a part of the workforce, in absolute terms their numbers have almost tripled since 1947. This has not only led to a permanent depression in comparative wages but has also led to a decline in per farmer production due to fragmentation of holdings.

The average farm size is now less than an acre and it keeps further fragmenting every generation. The beggaring of the farming community is inevitable. The only solution to this is the massive redirection of the workforce into the modern sector, which means much more capital investment.

As the decade ends, the Bharat and India divide has never been more vivid. The distance between the two only increased from 2010 to 2020. This is indeed the lost decade. Recovering from this will take a long time and will be painful. If we take too long, we might use up a good bit of the “demographic dividend” and the demographic window of opportunity. The ageing of India will be upon us by 2050.