Looking beyond the growth numbers

The Indian Economy witnessed a 7.8% growth rate in the fourth quarter of FY24, leading to an annual growth rate of 8.2% in the same year. Among the G20 nations, this has been recorded as the highest annual GDP growth rate; driven by improved net tax collections, increased capital expenditure, growth in services and an uptick in manufacturing. However, a deeper and more nuanced analysis shows that these growth figures overshadow the performance of other key indices and the problems faced by the informal sector which require attention from policymakers.

Reasons for growth

To begin with national income accounts, tracking the performance of measures like India's Gross Value Added (GVA) is essential. This measure is derived by negating the net taxes component from the overall GDP. Net taxes is defined as the differences between the taxes collected and subsidy expenses. A graphical analysis comparing GDP and GVA shows that although India's GDP has registered an uptick, the GVA has slowed down. This observation raises an important question as to what explains this GDP-GVA divergence.

The answer to this question lies in the increase in the total tax revenues collected by the Central government and the lower roll-out of its planned subsidies.

A further look into the sectoral performance of GVA shows that agriculture has witnessed only a slight improvement in Value addition while other sectors such as Industry and Services are slowing down. The moderation in the value-added from Services mostly stems from the reduced value addition of Trade and Hospitality services in the Q4 FY24. In the case of Industries, the decline in value added is led by the drastic reduction in the value-added of Mining and Manufacturing.

On the expenditure side, private final consumption expenditure (PFCE) has moderated to 4%. This is cause for concern given that PFCE occupies a major share of India's national income. The consumption expenditure would have been weaker if the government had not continued its extensive food subsidy scheme that began during the pandemic. Furthermore, there has been a moderation in the growth of gross fixed capital formation(GFCF), an indicator of the economy's investment levels.

Following the jump in the post-Covid period, goods exports have stagnated. Furthermore, goods exports declined by 3% in 2023-2024 while total exports (goods plus services) remained nearly the same as in 2022-23. Excluding oil, gems and jewellery, goods exports have remained flat since 2021-22.

The export stagnation is unfortunate given that the ongoing global trade frictions such as those between the US and China, serve as an opportunity for India to present itself as an alternative market. This would result in companies looking to diversify their supply chains beyond the Chinese mainland.

The government’s production-linked incentive scheme to promote manufacturing in select sectors has some successes, such as Apple assembling iPhones in India (largely intended for the domestic market). Additionally, the government has been negotiating free trade agreements with the UK and the European Union. Following the elections, the new government must move fast to avoid losing the potential gains from the US-China trade disputes to equally competitive Asian neighbours.

India has witnessed a 4% improvement in its service exports. The country is known for its exports of IT services. However, policy experts have argued for promoting non-IT service exports such as Banking and Financial Services.

The fact that India's per capita income (~$2000) is the lowest among the G20 nations cannot be understated. This further implies that India has the lowest standard of living on average among those economies.

External Debt Pressures

India's external debt stands at 18% of the country's GDP, the lowest among the G20 economies. However, external debt is only a part of India's overall liabilities. For a full picture of what India owes to foreigners, it is more useful to track its international investment position (IIP), which shows the stock of international financial assets and liabilities at a point in time. The difference between them is called the net international investment position (NIIP).

NIIP is closely linked to current account flows i.e. the overall flows into and from a country due to trade, remittances and financial transactions. As seen in India and the US, consistent current account deficits lead to negative or lower NIIP because they have to be made up by acquiring capital liabilities in the form of foreign capital inflows. Net exporting nations like Japan, South Korea and Saudi Arabia have higher NIIP, as they use their trade surplus to buy foreign assets.

Since India’s foreign liabilities exceed its foreign assets, its net international position is negative (i.e., net in debt). Between 2003 and 2023, this net liability went up from $60 billion to $396 billion, rising from 9.9% to 11.1% of GDP.

Although India's external balance sheets suggest lower external risks, the asset-liability profile of most emerging economies, including India, magnifies their external vulnerability. India’s foreign assets largely comprise foreign exchange reserves which provide a cushion against exchange rate volatility. Contrast this with Argentina, whose foreign assets consist mainly of privately held foreign debt due to domestic capital fleeing to safer shores abroad.

On the other hand, India's liability side is dominated by foreign direct investment (FDI), which comes in as long-term investment and has a stabilizing effect because it is less likely to be pulled out suddenly.

Because of this “long debt, short equity" position adopted by emerging economies like India, the earnings on overseas investments are lower than dividends and interest paid to foreign investors. The difference, known as 'Net investment income', is negative for India and has been increasing with a rise in foreign capital inflows. In 2023, India paid $80 billion and received $55 billion as investment income, creating a gap of $25 billion.

Net negative investment income compounds the impact of the trade deficit, and makes it critical to attract enough foreign inflows to fill up both the gaps. Despite the low dollar debt and strong reserves, the resulting dependence on overseas capital makes India more vulnerable to external crises.

Jobless growth

Another notable issue with the nature of India's growth is joblessness. While official statistics state that unemployment stands at a mere 3%, private databases such as the Centre for Monitoring Indian Economy (CMIE) have indicated that unemployment in India stands at 8%. The Indian Employment Report 2024, a joint publication by the International Labour Organization and the Institute of Human Development, revealed a stark reality wherein 82.9% of the total unemployed in India were the youth. Employment creation remained abysmally low at 0.01 per cent between 2012 and 2019.

The report had thrown light on the precarious situation of young Indians entering the workforce. While the report's findings have been deemed questionable due to data inconsistencies, the official government figures tend to mask the harsh realities of the Indian job market since they ignore the lingering weaknesses in the informal sector where most Indians have lost work. It is to be noted that the informal sector has been previously hit by shocks such as the demonetisation drive of 2016 and the COVID-19 pandemic. Moreover, India's GDP measurement systems do not adequately reflect the performance of the informal sector since they only reflect the output generated by enterprises in the formal sector.

For a developing economy, the share of agricultural employment tends to decline over time due to increased rural-to-urban migration of workers which is explained by better wages and opportunities in urban areas. However, the pandemic caused a migration reversal in India wherein millions of city workers returned to the farms, leading to a subsequent increase in agricultural employment. This overcrowding of farms has hurt employment in cities and this trend persists even today.

A major reason for the lower creation of jobs is the private sector is not investing enough in new capacity. Although there has been an emphasis on reviving private-sector capital expenditure, the outcome has been mixed so far.

According to Projects Today , a web portal that tracks new projects, fresh investment announcements by the private sector fell 15.3% in 2023-24, while total fresh investment announcements across the government and private sector have dropped 4.8%. Worryingly, new investments announced by foreign investors declined by 32%. However, on the bright side, economists have been highlighting the 'crowding in' effect wherein an increase in the government capex could encourage the private sector to invest in new infrastructure projects as well as new capacity building.

Conclusion

While many such economic indicators are pointing in a direction different from that suggested by the headline GDP numbers, the bigger question that arises is whether the inaccuracy of statistics is so systemic and pervasive that it clouds the judgement of policymakers at the top. The presence of such statistical inaccuracies calls for greater dialogue among experts in economic statistics as to how national income measurement systems ought to change for a better assessment of India's economic realities.

Given the slowing consumption and exports, it is questionable whether a higher growth rate will be sustained in the upcoming quarters. With the new government assuming power in the Centre, the introduction and implementation of new economic reforms will determine the trajectory of India's growth in the future despite the prevailing uncertainties with regard to the pace of reforms.