This temporary slowdown, attributed to reduced government spending, raises broader concerns about the structural challenges underpinning India’s growth story
The GDP (gross domestic product) growth during the second quarter of the current financial year (FY) ending September 30, 2024, decelerated to 5.4 per cent down from 8.1 per cent achieved during the corresponding period of FY 2023-24. It was the lowest in seven quarters and well below the Reserve Bank of India’s (RBI) forecast of 7 per cent. It was even lower than the 6.7 per cent recorded during the first quarter of the current FY ending June 30, 2024.
Union Finance Minister Nirmala Sitharaman observed that deceleration was not a “systemic slowdown”; that it was a temporary blip caused by a reduction in government expenditure (courtesy, elections ended in the June quarter when many projects came to a standstill due to the model code of conduct). She exuded confidence that expansion during the third quarter would make up for the lost momentum. The Ministry of Finance (MoF) expects full-year GDP growth to be 6.5 – 7 per cent. Coming on top of growth of 8 per cent plus achieved during the previous three consecutive years, 6.5 – 7 per cent during the current FY is indeed impressive. Even at this lower level, the Indian economy continues to be the fastest-growing in the world. Then, why should it worry us?
Nearly 70 per cent of India’s GDP is driven by domestic consumption; the remaining 30 per cent is driven by investment and export. Domestic consumption includes government consumption and private consumption. Likewise, investment consists of capital spent by the government and private investment. During the last five years, the Central Government has done the heavy lifting especially when it comes to investment. An idea of this can be gauged from its budget outlay 2020-21: Rs 30.42 lakh crore; 2021-22: Rs 34.83 lakh crore; 2022-23: Rs 39.45 lakh crore; 2023-24: Rs 45.03 lakh crore; 2024-25: Rs 48.20 lakh crore.
The Centre’s capital spend during these years was 2020-21: Rs 4.39 lakh crore; 2021-22: Rs 5.54 lakh crore; 2022-23: Rs 7.50 lakh crore; 2023-24: Rs 10.01 lakh crore; 2024-25: Rs 11.11 lakh crore. The Central government has also been helping the states to boost their capital spend. During 2022-23, it provided them with 50-year Rs 100,000 crore interest-free loans.
During 2023-24, such transfers were Rs 130,000 crore. For the current FY, the transfers are kept at Rs 150,000 crore. It has also given incentives to promote investment in the private sector. The mother of all incentives was a reduction in the corporate tax rate to 15 per cent for new manufacturing enterprises and 22 per cent for existing enterprises. In this year’s budget, the corporate tax rate on foreign firms was reduced from 40 per cent to 35 per cent.
The Centre has also done its bit to give a boost to private consumption. In the budget for 2024-25, Sitharaman has given relief in personal income tax (PIT) of around Rs 17,500/- annually by changing the tax slabs under the New Income Tax regime and increasing in standard deduction by Rs 25,000/-. Less tax means higher disposable income in the hands of the people hence the scope for more spending. But, initiatives by the government alone can’t ensure high growth on a sustainable basis. To achieve high sustainable growth, it is necessary to give a boost to private consumption. The dip to 5.4 per cent during the second quarter of the current FY when the decline in urban demand took a toll even as heavy lifting by the Centre was not available (due to elections) should serve as a warning signal. This brings us to a systemic problem that has hampered growth for decades.
This has to do with inequalities in the distribution of income and wealth. According to an Oxfam report, ‘Inequality Kills’, the collective wealth of India’s 100 richest people in 2021 hit a record high of US$ 775 billion or over 25 per cent of India’s GDP. In conversation with ET Now at the recently held Times Network India Economic Conclave, Arvind Panagariya, Chairman, of the 16th Finance Commission said: “The inequality in the sense of the top 1 per cent as a proportion of the bottom 5 percent, yes, that inequality has gone up”. Thomas Piketty, a professor at the Paris School of Economics (he is known for his groundbreaking research on economic inequality, wealth distribution, and the dynamics of capitalism) says “the share of India’s top 10 percent population is currently at 55-60 per cent”. According to him, this should be 30-40 per cent.
Whichever source one looks at, we can’t wish away the fact that India is home to glaring inequalities in income distribution.
This, in turn, has to do with the manner in which fruits of development are shared amongst the people. Unambiguously, the sharing is unequal. According to an analysis of the financials of India’s largest companies – those comprising the BSE 500 index – over five years, the profits of corporations included in this index more than doubled from Rs 480,000 crore during 2017-18 Rs 1000,000 crore during 2021-22, whereas their revenue growth was only 47 per cent.
This means that payments to factors of production other than the owners of capital such as to employees/workers, etc., have been kept under a tight leash, resulting in a disproportionate boost to profits. A big slice of these profits has gone to the pockets of the shareholders of these firms.
Thus, the aggregate dividend paid by them increased from Rs 176,000 crore during 2017-18 to Rs 302,000 crore during 2021-22, which is an increase of 72 per cent. In those five years, cumulatively, they paid 34 per cent of aggregate net profit as dividends. This is an unusually high payout ratio - even higher than 30 per cent paid by the world’s largest companies in America’s S&P 500. Whether profits to the firms or high dividends to shareholders, it has been paid for or come at the cost of millions of others. Rs 1,000,000 crore profits of firms in the BSE 500 index during FY 2021-22 came at the cost of undermining the purchasing power of millions of consumers.
Likewise, the mammoth dividend fills the coffers of a few - the money that merely adds to their idle cash balances or is spent on a few luxury items – denying millions of workers decent income. The tendency to appropriate a disproportionate share of the proceeds of wealth generation by a few persons at the top can be seen even amongst the owners of small and medium enterprises (SMEs) who ape large enterprises when it comes to making payments to their workers.
The SMEs being employment intensive, a general belief is that giving a boost to them would help in creating more jobs hence, lead to a more equitable income distribution. But, their owners’ paying less to workers militates against this objective.
Even the millions of small and marginal farmers who by nature of their occupation play the role of owner as well as worker don’t get to earn a good income as a handful of traders buy their crops at throwaway prices even as the minimum support price (MSP) notified by the government remains mostly on paper. When, the enterprise-owning class no matter which occupation it is in and the scale of its operation is intrinsically prone to sharing less with those who are at the receiving end, inequalities are inevitable. In such a scenario, how can we expect a big push to the demand needed for sustained growth?
(The writer is a policy analyst; views are personal)
