Setting aside the gloomy projections based on short-term economic trends, what does long-term and comparative evidence reveal about the health of the Indian economy? After the 1991 economic reforms, the Indian economy reached a higher growth plateau of 7% compared to a prior rate of 3.85%. India witnessed a high growth momentum during 2003-04 and 2010-11 with a period average of 8.45% (GDP with base 2004-05) or 7% (base 2011-12). The momentum lost steam in 2011-12 and 2012-13, gradually picked up again gradually to reach the 8% mark in 2015-16, and then started falling consistently to reach 6.63% in 2018-19. This trend suggests that India’s current growth challenge has a structural dimension as it began in 2011-12.
Despite these fluctuations from 2011-12, on average, India clocked a growth rate of 7.07% from 2011 to 2019, a decent figure compared to China’s and the world’s economic growth rates. Whereas, like India, the growth of the world economy was fluctuating since 2011, China’s growth declined consistently from 10.64% in 2010 to 6.60% in 2018.
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Why couldn’t India’s growth momentum be sustained after 2010-11? To answer this, an in-depth analysis of trends in five key macroeconomic variables — consumption, investment, savings, exports, and net foreign direct investment (NFDI) inflows — was done for two different periods: 2003-04 to 2010-11 and 2011-12 to 2018-19. The results reveal that compared to 2003-2011, investment and savings rates and exports-GDP ratio declined in the 2011-2019 period. The investment rate declined from 34.31% of GDP in 2011-12 to 29.30% in 2018-19, caused mainly by the household sector and to some extent by the public sector, but not the corporate sector. The slump in the domestic investment rate in the 2011-2019 period was compensated by increased NFDI inflows. On average, NFDI inflow was 1.31% of GDP during 2011-2019 compared to 0.89% during 2003-2011.
The decline in household sector investment justifies the package of measures introduced by the Central government to revive the housing sector. The questionable policy, however, is the steep cut in the corporate income tax rate from 30% to 22%, aimed at boosting private investment. Given that the corporate investment rate has not eroded severely during 2011-2019, one wonders if the tax cut would help economic revival. A part of the largesse offered to Corporate India could have been used to spur rural consumption.
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The savings rate declined almost consistently from 34.27% of GDP to 30.51% between 2011 and 2018. This was also caused by a significant fall in the savings of the household sector in financial assets. Corporate savings did not fall. The fall in household financial savings is alarming and needs to be arrested. Savings are required to meet the requirements of those who want to borrow for their investment needs. Lower household savings imply lesser funds available in the domestic market for investment spending.
The decline in household savings has pushed up private final consumption expenditure consistently from 56.21% of GDP in 2011-12 to 59.39% in 2018-19. This suggests that economic growth during 2011-2019 was powered by consumption, not investment. In contrast, during 2003-2011, growth was powered by investments. Thus, the popular view that economic slowdown was caused due to a slowdown in consumption demand needs to be re-examined. There is no concrete evidence to suggest that the economy is facing a structural consumption slowdown.
India’s exports-GDP ratio declined from 24.54% to 19.74% during 2011-2019. The decline started from 2014-15, coinciding with a similar trend in the world export-GDP ratio. However, the drop in India’s exports was significantly larger than the world, a cause for concern. The exports- and NFDI-GDP ratio has deteriorated sharply and consistently in China after 2006. This, together with the consistent fall in China’s GDP growth after 2010, proves that the Indian economy is doing better than China.
Sthanu R. Nair is Associate Professor of Economics, IIM Kozhikode