India’s growth is set to beat China’s, but economists aren’t cheering
- The 9.5 per cent full-year growth forecast for India looks set to outpace China’s 8.5 per cent, but analysts say the figure is driven by a low-base effect
- Output is straggling, consumer sentiment remains lower than pre-pandemic levels and inflation is eating into household incomes
Now, he lines up with other men on a street corner in the Indian capital where contractors recruit day labour. “It’s all I can get,” said Shah, who earns a fraction of his former salary.
India just reported its economy grew by a record 20.1 per cent in the first quarter. Economists have forecast full-year growth of 9.5 per cent for the South Asian nation in 2021-22, beating all major economies – including China, which is seen as expanding by 8.5 per cent.
But for people such as Shah who are struggling, an upturn looks some way off.
The government says the April-to-June numbers are a classic example of a “V-shaped economic recovery”. But the devil is in the details.
The economy is doing fine in some sectors, such as agriculture and exports. But the headline growth figure is the statistical equivalent of an optical illusion, economists say.
“First-quarter growth looks good year-on-year, but the biggest growth driver is the low-base effect,” said D.K. Joshi, the chief economist at Indian rating agency Crisil.
When the government last year imposed one of the world’s toughest nationwide Covid-19 lockdowns, first-quarter growth shrank a dramatic 24.4 per cent. The shutdown wiped out jobs and businesses, and prompted millions of laid-off workers to migrate from cities to their villages – on foot.
“The hit was very large, so the year-on-year bounceback appears very large,” Joshi said. The economy contracted by 7.3 per cent in the full year, one of the biggest downturns globally.
A nascent recovery is under way. But what’s clear, analysts say, is the pandemic has hammered India’s economy and it could take years to fix the damage. Stripping out inflation, economic output was 9.2 per cent lower in the April-June quarter than in the equivalent 2019-20 pre-pandemic period.
Economists are also concerned that consumer spending, the main growth engine, is nearly 12 per cent lower than in the first quarter of 2019-20, while private investment is down 17 per cent.
“The fact the economy has still not recovered to the 2019-20 level, which was in itself seen as a disastrous year for growth, is not good news,” said Alok Sheel, a professor at the Indian Council for Research in International Economic Relations.
India’s growth skidded to an 11-year low of 4 per cent in 2019-20, the fallout from a chaotic cash ban and a hastily executed goods and services tax.
Adding to consumption concern is consumer sentiment, which is 44 per cent lower than in pre-pandemic days, according to the private Centre for Monitoring the Indian Economy (CMIE). Over the next 12 months, 42 per cent of households do not foresee their incomes rising, while 50 per cent expect their incomes to fall, the think tank’s surveys show.
“This is very seriously bad news because if consumption doesn’t grow, the economy won’t,” CMIE chief executive Mahesh Vyas told local news portal The Wire.
One sign of acute household distress is a 300 per cent increase in State Bank of India’s first-quarter loans against gold jewellery from a year earlier. And to add to consumers’ woes, inflation is now eating into incomes.
Also, after India’s big strides in lifting hundreds of millions of people out of poverty, Covid-19 has been erasing some of those gains. The middle class – defined as having a daily income of US$10-20 – may have shrunk by a third with 32 million people sliding into the lower-income bracket, while 35 million went from lower income to poor, according to US think tank the Pew Research Center.
A study by India’s Azim Premji University presented an even more distressing picture, suggesting 230 million people may have fallen under the daily minimum-wage threshold of 375 rupees (US$5.13).
Areas involving contact between people – including important employers such as restaurants, hotels and airlines – are running at 30 per cent below pre-Covid levels.
India reaches vaccination milestone as Covid-19 fight picks up pace in rural areas
One way the sectors’ fortunes will improve is through vaccinations, which will lower risk perception and improve public confidence. Inoculations have picked up pace sharply after a slow roll-out.
But with just 15 per cent of the country’s 940 million adults double-jabbed, many people are not expected to be fully vaccinated until some time next year.
“Technology sectors have benefited, but the bricks-and-mortar and contact-based services are still very weak,” Joshi said.
While he noted that people investing in stock markets had “gained phenomenally”, he said others were facing underemployment and unemployment “so we’ve anecdotal evidence that inequality is rising very sharply. And if inequality rises, so does the lack of growth potential”.
Growth momentum is vital for India to generate employment for the staggering 100 million young people who will join the workforce in the next decade.
Unlike rich countries that have used massive stimulus programmes to spur consumption, India’s growth-supporting policies have been skewed more to the corporate side. Yet to spur demand and buttress growth, it is people on lower incomes who need government income support.
New Delhi has announced a US$1.5 trillion plan to build infrastructure to create jobs. But its funding hinges on the government monetising US$81 billion of existing roads, railways, power and other assets by offering them on long-term leases. There is scepticism about the success of this latest initiative given successive administrations’ lacklustre privatisation track records.
“Current Indian GDP is less than US$3 trillion. If this has to jump to US$5 trillion in four years, the economy has to grow higher than 13 per cent per annum,” said Professor Vamsi Vakulabharanam, who teaches Asian political economy at the University of Massachusetts.
“Even in the best of scenarios, this is highly unlikely,” he told the Press Trust of India.
Right now, the worry is a third coronavirus wave will sweep the country, which could knock its recovery off course. Epidemiologists are warning of another leap in infections around October, when India’s festival season peaks.
“The biggest risk is a new variant which is resistant to the vaccine,” Joshi said. “That would be scary and we would be in new territory.”