The growth numbers for the Indian economy in the April-June quarter of the current fiscal were not expected to throw up any surprises. Given that the comparable period in the previous year had seen a big lull in economic activity due to the second wave of the Covid-19 pandemic, growth in Q1FY23 was expected to be 15 per cent or more; the Reserve Bank of India (RBI) had predicted 16.2 per cent. So, when the numbers came in at 13.5 per cent, and economists continued to flag high net imports, persistent inflation, sluggish rural demand and lower government spending, it did not bode well for India’s yearly growth. The fear is, it could well be under the much-touted 7 per cent. “That is a very low rate of growth for a country like India,” says former finance secretary Subhash Chandra Garg. Economists say it will not be enough to generate jobs, India needs to grow at 8-10 per cent.
Worse, whatever little post-pandemic recovery that has been achieved is unequal—while some sectors of the economy have done well, others have lagged considerably. For instance, cars in the compact SUV segment, priced over Rs 10 lakh and above, have seen booming sales, as have vehicles in the more premium category. But sales of two-wheelers, a measure of demand among low-income groups, have slowed. As incomes decline, more consumers are preferring lower-end consumer durables and smaller packages of FMCG products. Micro, small and medium enterprises (MSMEs) are still struggling with poor demand and capital crunch, with firms operating at half their capacity. Meanwhile, private investment is yet to return to pre-pandemic levels.
These developments have fuelled a sharp debate on the shape of India’s recovery after the pandemic. While former chief economic advisor Arvind Subramanian has called it a ‘V’-shaped one—signalling a sharp recovery on all fronts—others believe it is a ‘K’-shaped one. Among them is Garg, who believes the recovery is K-shaped in terms of household incomes. “The rich are getting richer, while the poor are seeing their incomes drop,” he says. Avoiding a definitive statement, D.K. Srivastava, chief policy advisor, EY India, ventures: “Could be a K-shaped recovery, but we need more evidence.” A Mumbai-based economist with a global bank is convinced it’s a K-shaped recovery, even if the government is unwilling to acknowledge it because it wants to portray that inequality hasn’t worsened. “Since we don’t have inequality data in India, everyone is looking at proxy indicators,” he adds.
But what exactly is a K-shaped recovery? It takes place when different sections of the economy experience different rates of recovery after a downturn. The parts that recover faster are represented by the upper arm of the ‘K’; those that lag behind represent the lower arm. “Typically,” says Garg, “asset prices and corporate incomes rise in a K-shaped recovery, while consumption among the lower 50 per cent reduces.”
To be sure, India’s recovery looks much better than in many other parts of the world that are staring at a recession. The country recently became the world’s fifth-largest economy, surpassing the UK, though Garg cautions: “There is no comparison from a growth perspective. They (the UK) are a $50,000 per capita income economy. We are at $2,000 per capita. We should look at these developments with sobriety.”
India Inc. is also expanding—Gautam Adani, chairman of the Adani Group, is now the world’s third-richest man and will invest Rs 5.6 lakh crore in green energy and infrastructure. Rival Mukesh Ambani’s Reliance Industries has announced a mega rollout of the 5G network with an investment of Rs 2 lakh crore by the end of October and an additional Rs 6 lakh crore investment in green energy.
That big corporates are doing well was also borne out by numbers in the June quarter, defying rising interest rates and inflationary pressures. Their bounceback from the pandemic complete, many of them have restored salaries to pre-pandemic levels or even given raises. India Inc. employees, per a survey of 500 large, medium and small companies across 13 major industry sectors by recruitment agency Michael Page India, got an average salary hike of about 9 per cent this year, against 7 per cent in 2019.
India’s GST tax collections have also been robust, rising 28 per cent year-on-year to Rs 1.49 lakh crore in July, the second highest since the new tax regime was introduced in July 2017, on the back of buoyant consumption. Bookings at airports and hotels are full, thanks to a revival of the travel and hospitality sector. The festive season that kicked off with Ganesh Chaturthi in September promises to drive consumption further as millions spend on homes, cars, consumer durables or food and recreation.
While these may be sufficient cause for cheer, there is also the other side of the picture. And it’s not pretty.
Misery of the MSMEs
After two years of the pandemic and the attendant shutdowns, MSMEs are still grappling with low demand and access to funding. D.S. Rawat, chairman of the MSME Export Promotion Council that boasts 50,000-plus members, says that the incentives announced by the government have not yielded the desired results. “Many of the MSMEs are not even aware of the various schemes launched,” he says. He is referring to the Emergency Credit Line Guarantee Scheme (ECLGS) the government announced to provide collateral-free automatic loans for businesses, a self-reliant fund for equity funding in MSMEs that have the potential and viability to grow and become larger units. The scheme has been extended till March 2023. A recent CMIE (Centre for Monitoring Indian Economy) study noted that ECLGS was effective in arresting major financial stress in the operations of the sector. MSME secretary B.B. Swain, too, had recently noted that Rs 1,600 crore had been invested in 88 MSMEs so far. But it is a drop in the ocean, given that India had 7.9 million registered MSMEs as of March 2022.
Barring a select few, a majority of small business owners are struggling for survival. Prashant Patel, who runs a family-owned business in Gujarat, has relied mostly on exports to keep things running. “Demand is lower than last year,” he says ruefully. “While prices of raw materials have come down, margin pressures are the same. Last month, orders were the lowest in the history of the company.” Patel could manage to keep his plants afloat by taking a loan of Rs 10 crore under ECLGS. His plants are currently running at 25 per cent capacity.
An uneven road
Auto sales reflect a mixed picture too. In August, according to data from SIAM (Society of Indian Automobile Manufacturers), passenger vehicles—including cars, vans and utility vehicles—saw sales of 281,210 units, a rise of 21 per cent over the previous year. Two-wheelers, however, saw a growth of just 16.63 per cent, despite the low base, selling 1.56 million units. A Crisil analysis confirmed the trend, showing that cars priced above Rs 10 lakh or in the premium segment sold five times faster in the past fiscal than lower-priced cars. The market for entry-level passenger cars, two-wheelers and three wheelers is yet to recover. Low demand courtesy falling incomes is one factor; a third hike in the repo rate and the continuing inflation have contributed to the stress. ‘In India,’ Crisil notes, ‘first-time users or those upgrading from used cars typically buy the lower-priced cars. With the pandemic significantly impacting the income sentiment of entry-level car buyers, purchases and upgrades have been getting postponed.’ Hence the lop-sided recovery in the auto sector.
Some categories of consumer durables are displaying a similar tendency. Devita Saraf, chairman and CEO of Vu Televisions, tells india today that the demand for high-end TVs—with a price tag of Rs 50,000 and above and size 55 inches and above—has grown fourfold since before the pandemic. “This segment is growing,” says Saraf. “Suddenly, people who had the capacity to buy one TV are buying multiple TVs. But the demand for smaller TVs—32 inch and 24 inch—is sluggish.” According to point-of-sale retail data by GfK Market Intelligence, ‘The television market witnessed a volume decline of 1.2 per cent in January-April 2022 versus January-April 2021. During the same period, the smart TV segment grew 10 per cent in terms of volumes.’ TV is among the products with the deepest penetration in electronics, with a reach of 65 per cent. BNP Paribas India pegs the TV market to be Rs 25,000 crore.
Kumar Rajagopalan, CEO, Retailers’ Association of India, echoes a somewhat similar sentiment. “Most items,” he says, “have witnessed inflation. Retailers are indicating that higher-priced items are selling well, but lower-priced items are not seeing as much growth. This clearly shows that while the upper middle and elite class are shopping, lower income group customers are not shopping much.”
THE MISSING JOBS
Demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) went up significantly. If around 23.26 million households demanded work under the scheme in April, 30.74 million households did so in May and 31.67 million in June. If demand dropped in July to 20.43 million, it was due to the monsoon affecting sites where MGNREGA work is provided, but was still higher than the comparable periods before the pandemic. Until August 3, about Rs 40,000 crore of the Rs 73,000 crore budgeted for the scheme, or nearly 55 per cent, had been spent in the first four months of the fiscal. Economic policy experts point out that the scheme has not recorded such demand since its inception in 2006 and is reflective of rural distress, inflation and unemployment. MGNREGA workers have been also demanding higher wages; the national capital witnessed a three-day protest starting August 4 in which workers from more than 15 states took part. They demanded that the wage be increased to Rs 600 a day—from Rs 210 a day currently—as the seventh pay commission had recommended. Compared to wage growth in listed companies, which has been in double digits, rural wage growth has hovered at 5-6 per cent. This is lower than inflation levels, which have remained above 6 per cent for eight months now.
India’s unemployment rate shot up to 8.3 per cent in August—the highest in the past year. CMIE data did reflect some recovery in July over the month before—from 13 million jobs lost in June, the number came down to 6.3 million in July. But as a CMIE analysis observed, ‘All the recovery is in agriculture.’
Indeed, the industrial and services sectors saw a fall for two months. The industrial sector lost 200,000 jobs in July, after losing 4.3 million jobs in June. The services sector lost 2.8 million jobs in July, after having lost 800,000 in June. Construction jobs saw an uptick, but they are considered low-quality. Manufacturing is yet to recover from the loss of employment during the pandemic. Employment has been hovering around 30-34 million, compared to 40 million before the pandemic. ‘This is a significant fall in employment by the manufacturing sector,’ according to CMIE. ‘The fall in manufacturing employment in the past two months is concentrated in large organised industries like chemicals and metals.’
High net imports and weaker government consumption expenditure, meanwhile, have kept overall growth soft in the first quarter, says Crisil. India’s imports grew faster than its exports, widening the current account deficit. Imports, with a 27.8 per cent share in the GDP, went up from Rs 11.6 lakh crore in Q1FY22 to Rs 18 lakh crore in Q1FY23. Government consumption spend rose only to Rs 7.3 lakh crore in Q1FY23 compared to Rs 6.6 lakh crore in Q1FY22. The cloud of global recession and frequent rate hikes by the US Federal Reserve aren’t helping matters either.
Until June, FMCG companies had also been calling out the weak rural demand. Post the June quarter results, Sanjiv Mehta, MD & CEO of Hindustan Unilever, had told investors, “In the June quarter, markets have grown in mid-single digits driven by price growth. Volumes continued to decline. Rural growth continues to lag growth in urban markets. We should also keep in mind that optically, on an year-on-year basis, the June quarter looks better than the March quarter, but that is on a low base of 2021 where the country was going through the second wave of Covid.” The demand environment remained stressed in view of the heavy inflation, which saw consumers switch to more affordable, smaller packs of branded consumer goods, Dabur India chief executive officer Mohit Malhotra revealed as the company declared its Q1 results.
However, in August, following good rains in July, demand for FMCG products in rural India grew 6.7 per cent in value over July, according to analysts studying firms’ earnings. The finance ministry is also sensing a revival of demand, especially in Tier 2 and 3 cities. Demat accounts (needed to trade in the stock markets) topped the 100 million mark for the first time in August, from 40.9 million in March 2020 before the pandemic. And a lot of the additions have come from small-town India, according to the finance ministry. The onset of the festive season is also expected to bring cheer and make consumption more broad-based.
Any optimism, though, has to be tempered with a healthy dose of caution. Diagnosing the shape of the recovery correctly will be the first step to determine the nature of interventions.
“Inflation,” says Garg, “is the biggest stress point. It adversely affects the lower strata of people. The rich don’t get as affected.” India’s retail inflation rose to 7 per cent in August, breaching the RBI’s tolerance limit of 6 per cent for the eighth consecutive month. To rein in the inflation, the RBI has been steadily hiking interest rates.
However, for Union finance minister Nirmala Sitharaman, India’s inflationary pressure is not a “red-letter priority”; job creation and equitable wealth creation are. To reduce the fiscal burden on the government and the states, and free up capital for investments that could trigger growth and jobs, a debate is brewing on whether the free foodgrain scheme that was started during the pandemic ought to continue. At the same time, economists find moves such as hiking export duties on rice and wheat as counter-productive as they may further impact farmers’ incomes. They recommend that the Centre and the states implement other measures to boost economic activity, such as rationalising food, health and education subsidies.
Low demand is also affecting private investment, which remains subdued. “MGNREGA should be extended to the population as a whole, or a corresponding scheme implemented in urban India,” says Srivastava.
MSME associations, meanwhile, are seeking more support to access credit. A further streamlining of paperwork could reduce compliance costs for small businesses. In an effort to increase tax revenues, filing and reporting requirements for business have seen a massive increase, which is contrary to the stated objective of ease of doing business. The Inspector Raj is still rampant, and while big businesses can hire an army of compliance experts, such a recourse hurts the competitiveness of small businesses and entrepreneurs.
Rationalising petrol prices is another option before the government, as the excise on petrol remains high. A boost to sectors such as renewables can also reduce the country’s energy dependency. The US, for instance, has come up with a slew of incentives for semi-conductors; Congress passed the CHIPS Act in July 2022 to strengthen domestic semiconductor manufacturing. India, too, has a semi-conductor policy, but analysts say it could be further incentivised.
The double-digit growth number for the quarter cannot disguise thefact that the Indian economy is still not out of the woods. The next phase of policies should strive to correct the inequalities that the pandemic aggravated. Only then will India’s growth become more meaningful.