The most significant cause for the decline of growth is the decline in capital investment.
When India’s economic history is written in some future date, and when a serious examination is done of when India lost its way to its “tryst with destiny”, the decade of 2010-20 will be highlighted. The facts speak for themselves. India’s real GDP growth was at its peak in March 2010 when it scaled 13.3 per cent. The nominal GDP at that point was over 16.1 per cent. The nominal GDP in September 2019 was at 6.3 per cent, its lowest in the decade. Since then, the downward trend is evident and we are now scraping the bottom at about a real GDP growth rate of 4.5 per cent, this too with the push of an arguably inflationary methodology. Our previous CEA, Arvind Subramaniam, estimates that India’s GDP growth is overestimated by at least 2.5 per cent. BJP MP Subramanian Swamy is even more pessimistic. He estimates it to be 1.5 per cent.
The decline in the promise is amply evident by the change in the make up of the economy during this decade. In 2010 agriculture contributed 17.5 per cent of GDP, while industry contributed 30.2 per cent and services 45.4 per cent. In 2019 that has become 15.6 per cent, 26.5 per cent and 48.5 per cent respectively. The share of industry has been sliding. This is the typical profile of a post-industrial economy. The irony of India becoming post-industrial without having industrialised must not be missed.
The most significant cause for the decline of growth is the decline in capital investment. It was 39.8 per cent of GDP in 2010 and is now a good 10 per cent lower. Clearly, without an increase of capital investment, one cannot hope for more industrialisation and hence higher growth. What we have seen in this decade is the huge increase in services, with now mostly means increase in public administration and informal services like pakora sellers.
At the turn of the century, as China’s GDP began its great leap forward (from about $1.2 trillion in 2010 to $14.2 trillion in 2019), it was also a heady moment for India whose GDP of $470 billion began a break from the sub-5 per cent level of most of the 1990s to the rates we became familiar with in the recent past (to hit a peak stride of 10.7 per cent in 2010). At that point, if growth rates kept creeping up, we could have conceivably gone past $30 trillion by 2050. But for that the growth rate should consistently be above seven per cent. It seemed so feasible then. In 2010 it seemed we were well on track. But now we are struggling to get past $3 trillion, and the $5 trillion rendezvous that Prime Minister Narendra Modi promised by 2024 will have to wait longer.
To be fair to Mr Modi and the NDA, the decline began early in the second term of the UPA when capital expenditure growth had begun tapering off. Dr Manmohan Singh is too canny an economist to have missed that. But UPA-2 also coincided with the increasing assertion of populist tendencies encouraged by the Congress president and her extra-constitutional National Advisory Council. The decline in the share of capital expenditure was accompanied by a huge expansion in subsidies, most of them unmerited. Instead of an increase in expenditure on education and healthcare, we saw a huge expansion in subsidies to the middle and upper classes like on LPG and motor fuels. Even fertiliser subsidies, which mainly flow to middle and large farmers with irrigated farmlands, saw a great upward leap. Clearly the money for this came from the reduction in capital expenditure. Mr Modi’s fault in the years since 2014 is that he did nothing to reverse the trend, and only inflicted more hardship by his foolish demonetisation and ill-conceived GST rollout.
The realities are indeed stark. The savings/GDP ratio has been in a declining trend since 2011 and the Modi government has been unable to reverse it. Consequently, the tax/GDP ratio and the investment/GDP ratio have also been declining. The rate of economic growth has been suspect, and all objective indicators point to it being padded up. The drivers of economic growth, such as capital expenditure, are dismal. Projects funded by banks have declined by over half since 2014 to less than `600 billion in 2018-19. Projects funded by the market have dropped to rock bottom. Subsequently, the manufacturing/GDP ratio is now at 15 per cent. Corporate profits/GDP ratio is now at a 15-year-old low at about 2.7 per cent. You cannot have adequate job creation if these are dipping. Declining rural labor wage indices testify to this.
Between October 2007 and October 2013 rural wages in the agricultural and non-agricultural sectors grew at 17 per cent and 15 per cent respectively. Since November 2014, however, agricultural and non-agricultural sector wages grew at only 5.6 per cent and 6.5 per cent respectively. In 2019, average rural wage growth has further fallen to 3.1 per cent.
It is very clear now that the urban lane has been moving well in India. Indeed, so well that an Oxfam study revealed that that as much as 73 per cent of the growth in the past five years accrued to just one per cent of the population. This does not mean it is just the tycoons of Mumbai and New Delhi who are cornering the gains. The government now employs close to 25 million persons, and these have now become a high-income enclave. The number of persons in the private and organised sector is about another 10 million. In all, this high-income enclave numbers not more than 175-200 million (using the thumb rule of five per family). Much of the consumption we tend to laud is restricted to just these people.
Agriculture is still the mainstay of employment. Way back in 1880 the Indian Famine Commission “had observed that India had too many people cultivating too little land”. This about encapsulates the current situation as well. While as a percentage, farmers and farm workers have reduced as a part of the workforce, in absolute terms they have almost tripled since 1947. This has led to a permanent depression in comparative wages but has also led to a decline in per farmer production due to fragmentation of holdings. The average farm size is now less than an acre and it keeps further fragmenting every generation. The beggaring of the farming community is inevitable. The only solution to this is the massive redirection of the workforce into less skilled vocations such as construction.
The simple fact that the share of agriculture is now about 15.6 per cent of GDP and falling, while still being the source of sustenance for almost 60 per cent of the population, reveals the stark reality. A vast section of India is being left behind even as India races to become a major global economy.
As the decade ends, the Bharat and India divide has never been more vivid. Our social scientists are still unable to fix a handle to this because the class, cultural and ethnic divides still eludes a neat theoretical construct. Yet there can be little disagreement that there are two broad parts to this gigantic country, and one part is being left behind. The distance between the two only increased from 2010 to 2020. This is indeed the lost decade. Recovering from this will take long and will be painful. If we take too long, we might have used up a good bit of the “demographic dividend” and the demographic window of opportunity. The aging of India will be upon us by 2050.