If you belong to a middle-class family and like to keep a check on the prices of your monthly groceries, you may have noted a few things. Assuming you are consuming the same quantity of items, your monthly bills continue to rise. When you pick up a financial daily, you notice that the inflation rate in the economy is at a record low. You then wonder about affordability. You ask yourself whether you are earning enough to cover all your expenses.
For the decade to 2023, the dominant narrative has been that India was an oasis of a large economy, with a steady growth of 6% to 7%. But for many Indian households, the reality on the ground has felt like a "puzzle". Those in white-collar jobs wondered about the lack of new opportunities in an otherwise booming economy.
A new working paper co-authored by former economic advisor Arvind Subramanian suggests the answer is simple: growth was not as strong as reported. Their research indicates that since 2011, India's true annual growth has likely been between 4% and 4.4%, a significant drop from the official 5.9%. While a 1.5% to 2% difference might sound like a rounding error to a statistician, in the world of personal finance, it changes how you should manage your money.
Your income and the slowdown
The report shows that your ability to purchase goods and services was overstated by up to 31%. That probably explains your frustration that your employer did not pay you a higher wage despite a visible rise in day-to-day expenses. Businesses saw wholesale prices for inputs decline, but did not pass along those lower costs to customers, employees, or vendors. The visible urban slowdown reported by most consumer companies in their analyst conference calls after financial results is better explained as a result. While you relied on personal loans to own a new home, a car, or for travel expenses, businesses used that wholesale cost savings to borrow less money from banks. That led to a surge in personal loans and a slow pace of credit uptake in the corporate sector. The government did the bulk of its spending through capital expenditure. Credit growth slows when businesses have overcapacity and do not see a significant pick-up in consumption demand. That also leads to a slowdown in any new hiring.
With a near-7% average economic growth, companies should have fought hard for talent. The analysis finds that the bank credit growth for expansion slowed to 5.6% from 15.6% since 2012. Industrial production declined to 2.9% from 16.1%, as corporate sales growth remained sluggish. That shows tepid salary growth for you and a feeling of stagnating income.
Investment overvaluation
Asset prices today reflect future growth. If investors had assumed a GDP growth rate of 7% and the reality was 4.5%, they have overpaid for assets since 2012. When growth is faster, demand for middle-class homes surges. However, the only segment to report faster growth was the luxury homes segment. In the stock markets, Indian equities remain expensive compared to other emerging markets and even to listed companies in rich countries. The selloff due to the crisis in West Asia has shaved off trillions of dollars from asset prices. However, since that has happened across the board, Indian assets continue to look expensive relative to them.
What could you do now
It is important to understand that the data is a double-edged sword. An overestimation of growth would lead to an overcorrection in asset prices. You may want to be ready for that situation. A logical step is to ensure that your portfolio's average returns are not 12-15% annually, as assumed in the faster-growth-rate scenario. They could trend down, which means you need to keep a solid emergency fund. You may want to hold more cash and minimise investment risk. The higher liquidity could also give you a chance to buy quality equity assets or property when there are situations of a sharp sell-off for reasons not related to domestic fundamentals. You may want to speak to your financial advisor to determine the right steps.