Last week, the Central Statistics Office (CSO) released the latest numbers on the Indian economy. The data revealed that the economy’s growth rate in the first quarter ended 30 June had dropped to a six-year low of 5%. What is most worrying about this number is not just that it confirms the fact that the Indian growth story is rapidly losing its momentum for now; nor is it the fact that India has lost its bragging rights as the fastest growing economy in the world. Instead, it is the sobering truth that India’s consumption story is going off the rails.

This is particularly disconcerting given that the economy, in the absence of little or no investment over the last several years, has essentially been running on the single engine of consumption. Intriguingly, it is rural demand which is shrinking the most; and, this, despite the nearly ₹1.5 trillion sugar high stoked in the rural economy through a combination of the income support scheme PM-Kisan and the rural employment guarantee programme. Admittedly, the rural economy is bearing the brunt of the shift in terms of trade away from agriculture since 2008 and declining rural wages. Yet, it is surprising that such a large injection of funds is not mitigating the problem of declining rural demand.

Worryingly, over-eager spin doctors in government—some, more loyal than the king—are seeking to sell the latest economic data purely as a cyclical downturn aggravated by a “gloom and doom" narrative and something that can be reversed through policy interventions and pep talks by the finance minister. This explanation is too glib. The current state of the Indian economy is far more complex and beyond such binaries. Yes, while global conditions have become inclement, it is also a fact that the Indian economy is being buffeted by disruptions—the rise of the ride-sharing economy and a mindset reset among younger consumers are taking a toll on automobile sales—and the painful withdrawal effect caused by the winding down of the dubious legacy of a black money economy and crony capitalism. What we are seeing therefore is probably a combination of structural and cyclical conditions afflicting the economy.

More worrying is that the advisers in government are consistently failing to read the tea leaves on the consumption story. A fortnight ago, the Reserve Bank of India (RBI) released its consumer confidence survey data, obtained from a survey conducted in 13 cities, which showed that Indian households are becoming increasingly wary about the state of the economy. Admittedly it is a dip-stick, but the conclusion should logically have served as a wake-up call: “Consumers’ perceptions on the general economic situation and the employment scenario softened, while their assessment of their own incomes turned out to be less optimistic than in May 2019."

The data on the gross domestic product (GDP) released by CSO only confirmed these apprehensions of the state of the consumer economy. According to it, private consumption expenditure decelerated to an 18-quarter low of 3.1% in the June quarter. And within this, the real story is the drying-up of consumer demand in the rural economy.

The challenge then is clear: reviving rural demand. Mere front-loading of the Union government’s spending may not be enough to revive it; in any case, the clock is running out as we are already into the second half of the fiscal. Instead, there has to be a concerted focus by both the Union and state governments to fix the structural problems in the agrarian economy. For example, the terms of trade challenge wherein farmers are seeing a consistent fall in the prices of their products cannot be fixed by price support measures—which is also fiscally expensive. Opening up an export market is one option, but this will have to be accompanied by a dismantling of the rigid legacy institutional structures which have prevented genuine price discovery for farmers.

In the final analysis, it can be said that there is no cause for panic. Yet, there is reason to be worried. Especially since the diagnosis is eluding the policy mandarins for now.

Anil Padmanabhan is managing editor of Mint and writes every week on the intersection of politics and economics.

Subscribe to Mint Newsletters * Enter a valid email * Thank you for subscribing to our newsletter.

Share Via