India’s Economy: Known Knowns and Known Unknowns

After all, till as late as in December 2023, the RBI’s Survey of Professional Forecasters “assigned highest probability to real GDP growth in the wider range 6.0-6.9 percent for 2023-24”.
Image used for representational purposes only
Image used for representational purposes onlyExpress illustrations

An old maxim states that people, in general, are quick to believe that which they wish to be true. The truism—attributed to Julius Caesar—plays out in India’s public discourse rather predictably every few months. The episodes of ricocheting rhetoric with surround sound effects follow the release of data on the state of the economy.

Typically, in the intensely polarised political amphitheatre, every episode finds the believers singing the rah-rah raag and the sceptical atheists argue in disbelief. The agnostic folks are left querying the experiential for answers.

On Thursday, India and the world at large was informed that the economy will end the year with a GDP growth of 7.6 percent—up from 7.3 percent pronounced on January 5. The superlative performance produced what is colloquially termed as sticker shock.

After all, till as late as in December 2023, the RBI’s Survey of Professional Forecasters “assigned highest probability to real GDP growth in the wider range 6.0-6.9 percent for 2023-24”.

The upgrade in growth follows a flurry of revisions for previous years and quarters—growth for 2022-23 was scaled down and revised upwards for the current year’s first three quarters—including the revelation that economy grew at 8.4 percent between October and December 2023.

There has been much lather generated on the 8.4 percent GDP growth, while the gross value added or GVA for the period was 6.5 percent. The explanation for the lower GVA is explained by a lower spend on subsidies. (The CSO defines GDP= GVA + taxes – subsidies.) Interestingly, the GVA has slid sequentially for three quarters from 8.2 percent to 6.5 percent and probably deserves a more elaborate explanation.

Debates on the state of the economy are often waylaid by conspiracy theories and lost in minutiae of data.  It is manifest that the economy has performed better than expected and forecasted. This is visible in the data on expenditure on infrastructure, in the rise in revenues both in GST and direct taxes. The GDP estimates also reveal a robust growth in manufacturing and construction—again validated by growth in earnings and, of course, the stellar rise of the stock indices.

That said, not everything is hunky dory and there is reason for the rah-rah brigade to temper the tempo. The estimates also signal a slowdown in velocity and momentum of growth—the end-of-year projection 7.6 percent suggests GDP growth in the fourth quarter would be sub-6 percent. As with other elements of social order, economic growth too is governed by the law of averages. Is this dip an aberration, a statistical effect, or is there a structural issue that must be addressed to sustain growth?

Data suggests not everyone is joining the party. The fact that private consumption is growing at barely 3 percent even though the GDP is surging at 7.6 percent should be a cause for concern. To appreciate the significance of this data point, it is useful to note that consumption accounts for 55.6 percent of the GDP. The question which begs an answer is whether the slide in consumption is a seasonal issue or a fundamental fall in the ability to spend?

The context is critical. Government intervention is designed to mitigate suffering and create room in household budgets. Consumption is stalling despite an aggressive expansion of welfare—food rations to over 810 million, healthcare to over 500 million, rural jobs to over 160 million, besides cash transfers, provision of houses and consumables.

The impact has been visible in the sales of entry-level goods and earnings of consumer goods and durable makers—indeed, in the run up to the interim budget, industry chambers argued for the expansion of welfare benefits.  It has been argued that India’s growth story is investment-led, but those who argue so would know that there is a statute of limitations and the consequences are visible in the neighbourhood.

The other worrisome data point in the GDP estimates concerns two of India’s largest employers—services, which account for a bulk of new jobs, and agriculture, which employs over 45 percent of the workforce.

Agriculture, which contracted in the third quarter, may end the year with a growth of 0.7 percent. The service sector, which accounts for a major share of the economy, has lagged and is stalling well below historic levels of double-digit growth. Beyond the data, there are vignettes from the political economy worthy of attention—of 48 lakh youth applying for 60,000 jobs, the consistency of paper leak scams across states, the steep drop in placement of students at engineering and management colleges.  

There are immediate issues and then there are long-term issues which call for attention. IT and IT services are among the largest employers in India after security service agencies. Last fortnight, NVidia chief Jensen Huang declared AI will kill coding. Add the accelerated adoption of generative AI reflected in investments nearing $200 billion by global companies. India’s challenges could well be its opportunities.

India’s economy is poised at the intersection of known knowns and known unknowns. The data presented by the advance estimate is a useful compass. There is a need for a debate on the trajectory of economic growth, the challenges reflected by the data, the underlying conditions that hinder growth—and the mapping of who is gaining and who is lagging. Remember, momentum is mass x velocity.

Shankkar Aiyar

Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit Revolution, and Accidental India


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