A different economic question | The Indian Express

The government appears to have laid the blame for what it believes to be the cyclical downturn largely at the door of the RBI, which is abdicating its responsibility to steer the economy. The central bank is also to blame for the slowdown – until recently it kept the rupee from finding its real value, thereby eliminating export competition, and continues to keep monetary policy very tight. But the problems facing the economy run deep. It’s not something that low interest rates alone can fix. That is why the weakness of the rupee this time is different from previous episodes, such as the financial crisis of 2008 or the taper tantrum of 2013.

The problem is structure and distribution. The evidence is clear.

The high growth rates observed after the pandemic were mainly driven by the increase in the export of services, in particular, the increase in Global Capability Centers (GCC). Its results have been seen in residential areas, passenger cars and other high-quality goods and services. This helped to increase the rate of population growth, revealing weakness in large parts of the economy.

However, this growth structure is biased in favor of the highly skilled who are a very small part of the workforce. The paths to the top are easily accessible to the top talent, which limits the growth of the collective with the power to spend money with great vision. Put differently, as more are moving up the income ladder, total consumption has not been growing fast enough. And with GCC growth now stabilizing at low levels, the flaws in the wider economy are now more visible, also reflected in aggregate data.

Limited growth, however, has been a feature of the Indian economy, reflecting its inability to produce the most productive forms of employment for the majority of workers. But travel seems to have become more restricted since the pandemic. Undoubtedly, the clearest evidence of this can be found in the car market, in particular, the market of low-priced, small – mid-range cars.

Take the portion below Rs 10 lakh. Cars in this segment are often bought by first-time users or those upgrading from two-wheelers or used cars. In 2014-15, this segment accounted for 73 percent of all vehicles sold in the country. Sluggish sales meant that in 2019-20 the segment’s share fell to 65 percent. The descent after that is pretty amazing. By 2024-25, the segment accounted for only 46 percent of all vehicles sold (Data sourced from Crisil). In the case of Maruti Suzuki, in the first half of this year, sales of its small and medium cars were lower than in 2017-18.

Simply put, there aren’t many new buyers for low-priced small cars. This shift in consumption is not limited to the passenger car segment. The emphasis on “premiumisation” is nothing but an admission by the corporate industry that the market as a whole is not growing fast enough, for the elite to consume.

The labor market simply does not provide enough productive employment opportunities and real wages are not growing fast enough. As fewer people move up the income ladder, broad consumption demand does not grow as quickly.

While millions more have joined the workforce, many are now working, either as unpaid help in homes or roadside shops or in agriculture. Slum centers and employment continue to see a steady increase, indicating the absence of alternatives. All of these figures should have come down if the economy was producing productive jobs. Formal employment, as EPFO ​​data shows, remains driven by professional services, which are nothing more than staffing providers, general contractors, and security services – segments that do not require high levels of skills.

The failure of limited job creation and muted wage growth can be seen in the major debt crisis. Household debt has risen to 43 percent by June 2024. While this may be low compared to other emerging economies, it should be worrying that not only is a portion of loans taken out to finance spending, but almost 60 percent of those taking out loans in the second quarter they had more than three live loans. So, not only are more families taking on debt, they are taking on more debt. But even this increase in debt has failed to boost economic spending significantly.

With the appearance of weak demand and uncertainty about government policy, investment activity continues to be subdued. New project announcements dropped as per CMIE. FDI remains below recent highs. If India Inc. often silent on growth numbers and talking about a shrinking middle segment, the situation is likely to worsen. While the corporate sector is often driven to invest and take risks, if the reign itself is taking nothing – almost 11 years in government – then who is against the risk? In the era of industrial policy and PLIs, perhaps the pivot of the largest business houses in the country – from the industrial sector to services – suggests something.

ishan.bakshi@expressindia.com