As expected, the Economic Survey FY23 (ES23) is full of optimism, although it admits to a series of potential risks inherent in the current economic situation. It projects that economic growth will be 6.5% in FY24, even though we know that the economy has run out of steam of its rebound from a contraction of 6.6% in FY21, when the world economy only contracted by 3.15. The IMF is projecting lower growth rates than the Economic Survey of 2023.
There are four drivers of growth in any economy—private consumption expenditure (PFCE); investment (public and private); exports; and government expenditure.
Consumption expenditure (nearly 60% of India’s GDP) is heavily dependent upon sustained growth in personal incomes, but regrettably, job growth fell sharply. In fact, with a base of 2019-20 (before Covid), per capita consumption is actually just above that level in FY23 (First Advance Estimates). CMIE data shows unemployment running at around 10%, while at the same time, the employment rate is falling.
However, the ES23 claims “enhanced employment generation and falling urban unemployment rates, while EPFO net monthly registration is growing faster”. What the ES23 ignores is that employment generation, as defined by the NSO’s Periodic Labour Force Survey, includes unpaid family labour, which has grown sharply since 2018, which is a sign of distress, not of dynamic paid employment; the same problem applies to the claim about ‘rising urban employment’.
On EPFO net registration, it is well known that it is constantly being revised, and no one who understands labour force statistics in India uses EPFO registration as evidence of ‘job creation’ (only of some formalisation of existing informal jobs, if that, since the numbers are regularly revised).
Another reason why future consumption demand is likely to remain tepid is that the share of the working-age population employed has fallen consistently from 2016 to 2022. The employment rate was 43% in 2016; it had fallen to 36% by 2022.
In other words, a 7-percentage-points fall in the employment rate in a country with the largest youth population in the world. If you exclude unpaid family labour, there is no increase in the employment rate in India.
With the actual employment rate falling, the number of ‘discouraged workers’ keeps growing—who are not even looking for work. There is practically no mention or reference to this subject in ES23.
Another reason why consumption has been low, and is likely to remain low, is that wages of those employed have fallen after 2017-18 (as estimated from NSO employment data). The Economic Survey does not recognise this as a major issue. ES23 accepts inflation has remained at 6.8% in FY23, well above the permissible range of RBI (2-6%), which kept consumer spending repressed.
But like consumption, private investment, the second driver of economic growth, is also significantly dependent upon expectations about consumption growth in the present and the future. Private investment inherited by the current government was 31.3% of GDP in 2013-14 (ministry of finance), which fell steadily thereafter, and was 29% of GDP in 2018-19, the eve of Covid.
It fell further during Covid, to 26.6% in 2020-21, before recovering to 28.6% in 2021-22, and further to 29.2% in 2022-23. As the pandemic struck, capacity utilisation fell to 60% in July 2021. Although it has been gradually climbing since then, it still stands at 74%, which is not sufficient to encourage private firms to initiate much new investment (or new hiring on the scale required).
However, ES23 claims that investment could rise because banks have ‘cleaner balance sheets’, which is enhancing lending; gross non-performing assets (GNPAs) have fallen to 5%. We all know, though, that the NPAs have fallen because the resolution process set in motion by the government has led to writing off of banks’ debt, mostly of public sector banks, to the tune of 87%, with barely `1.3 trillion being recovered from over `10 trillion of lending!
ES23 also notes a credit growth to MSMEs by a very high 30.5% between January-November 2022. Fair enough. But MSMEs took a heavy beating in and after the demonetisation measure, as most of their working capital is in the form of cash.
With 86% of the currency demonetised suddenly in November 2016, thousands of MSMEs closed down. It set in motion the fall in GDP growth for nine quarters till the pandemic lockdown.
Could the next driver of growth—exports—provide the impetus for aggregate demand? The ES23 rightly lauds the fact that there has been “a surge of growth of exports in FY22 and in the first half of FY23”. But it does not mention the harsh fact of the export record of the first five years of this government.
While services exports remained buoyant through Covid, merchandise exports did not for five years after 2014; for five years, they were lower than the $318 billion achieved in 2013-14. They have recovered, but the Ukraine war and impending recession in advanced countries bode ill.
Finally, there will be limits in FY24 on the government raising public spending, including for capex (which could potentially raise GDP growth), as the public debt to GDP rose from 65% to 90% of GDP during Covid, before falling somewhat.
The imperative to contain a fiscal deficit of the general government of close to 10% of GDP remains overwhelming, a fact recognised by ES23. For all these reasons, the optimism of the ministry of finance’s Economic Survey 2022-23 seems somewhat over the top.
