Dear Reader, On August 15, 2023, India would have lived 76 years as a free country. Over those years, the country has achieved food security, the rise of large business conglomerates, a healthy banking and financial system and an enviable external sector balance sheet. Of course, there have been notable pitfalls and learnings along the way.
As any 76-year-old developmental economist will tell you, all achievements come to nought if there isn’t an equitable improvement in the per capita income of the country. The per capita income in 2022-23 showed a 6.13 percent year-on-year increase to Rs 1,15,746. That is an impressive growth from as little as Rs 250 in 1947. All things considered, the income of the average Indian has increased manifold.
Per capita income will continue to grow only if the gross domestic product grows enough to keep the population employed and earning. Notwithstanding giant steps since being free from the British Raj, India still encounters a struggle every few years on racking up a decent GDP growth. Just before the pandemic hit, India was ridiculed for returning to the so-called Hindu rate of growth -- referring to average low growth of 4 percent before the 1990s economic reforms. The country needs to grow by at least 8 percent to generate a reasonable level of employment. In FY24, the GDP growth is seen at 6.5 percent by the Reserve Bank of India and private forecasters put it between 6.5-7 percent. Over the past six decades, the GDP growth has clocked 8 percent and above only in a handful of years.
But there is no need to despair as the ingredients to clock 8 percent growth are already there and policymakers just need to use them judicially to reach their goal. Neelkanth Mishra, who heads economic research at Axis Bank, pointed out that India should encourage female participation to increase labour output, be welcoming to foreign capital to increase capital growth and keep its total factor productivity elevated. He thinks the policy environment is more conducive to growth now than in earlier years. “The imperative now is to sustain this momentum, something that I foresee continuing over the next five years.”
Mishra believes that India is at a point where financial savings will surge and these savings are now flowing more towards financial assets than physical. The chest-thumping of the mutual fund industry on all-time high inflows is just one aspect among many.
Indeed, India is young and raring to save and invest.
But the average Indian doesn’t seem to be as optimistic as Mishra. Our Chart of the Day explains what the latest consumer sentiment surveys of the RBI show. Consumers have become more pessimistic about the current situation and have toned down their optimism for the future. Consumer sentiment, which surged after the COVID pandemic waned, is plateauing now.
The culprit is inflation. The trajectory of inflation, the rate at which prices rise, is unpleasant for India and policy failures stand out in an ugly way. Price rise is an old foe and has returned this year as well through the food channel. Household inflation expectations are inching up and consumers are feeling the heat of the price rise. Mishra’s take is that if inflation is imported, it would drag on consumption, but domestic driven inflation does not cause much alarm. Indeed, historically India has suffered the most when hit by imported inflation, notably a commodity price surge. Much of the inflation now is due to supply shocks and the RBI hopes this is transient.
Indians are growing restless amid rising prices and an uncertain outlook on income and employment.
But the average Indian continues to be hopeful. The RBI’s surveys show that one-year ahead expectations have not turned for the worse significantly. Businesses are hopeful of order books and earnings growing, and policymakers are hopeful of keeping the whole process straight and sane. Stock markets, an indication of wealth, have defied gravity so far this year. El Nino may rain on this parade, but the rural economy is not drowning yet. The yearly festival indulgence should perk up sentiments even further, if the RBI is to be believed.
On our 77th Independence Day, India is young, restless but hopeful.
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