The dissonance on whether India is indeed growing as strongly as the reported GDP numbers is a matter that remains unsettled with new evidence pointing towards a hugely distorted K-shaped trend.
The true test of economic growth lies in its relevance for households (HH), whose income in the Indian context represents 76% of GDP. The key GDP growth drivers in recent times have been the large government capex (7% of total spending) on infrastructure, growing over 60% year-over-year, and the strong pace of leveraged consumption. However, the endogenous growth components exhibit structural feebleness.
First, RBI’s data (August 2023) on the project approvals by banks and financial institutions revealed the shallowness of the claimed private capex revival. While the total cost of projects sanctioned by banks and financial institutions increased by 14.9% on three year compound annual growth rate (CAGR) till FY23 at Rs 2.7 trillion, it is majorly concentrated in the non-industrial sector, i.e. the infrastructure sector (Rs 1.6 trillion), mainly roads, dependent on government capex. Total project cost excluding Infra and metals at Rs 632 billion saw a contraction of 1.6% on three-year CAGR. The implied lack of manufacturing sector jobs is now corroborated in the latest Periodic Labour Force Survey survey of the government of India (October, 2023).
Second, the 19% year-over-year decline in net financial savings of households in FY23 (RBI) was glossed over as an indication of rising household confidence with respect to their current and future incomes, a la Tobin’s wealth effect (1967). Accordingly, expectations of higher income growth should reduce the current saving rate.
However, the facts are leaning towards Modigliani’s life cycle hypothesis (1955). A deceleration or decline in the real income of workers (who save) relative to those of retirees (who dis-save), would reinforce the decline in savings as consumption for the saving cohorts gets adjusted slower than the erosion in real incomes, thereby catalysing leveraged spending.
Our empirical estimates for FY08-FY19 show that a 1 percentage point decline in real income would imply a lesser (0.6 percentage point) decline in consumption thereby resulting in a decline in HH savings (-0.3 percentage points). These estimates imply that the contraction in HH savings and the decline in savings rate since FY12 is due to slowing or declining incomes rather than bountiful incomes.
Using the combination of actual net financial savings of RBI data (-18.8% year-over-year in FY23), an estimated 6.2% growth in physical savings, and a 12.5% decline in investments in gold and silver (trade data), the overall savings for HH in FY23E is estimated to have contracted by 3.7% year-over-year in FY23E. Adding household savings to private final consumption expenditure we get household incomes, which in real terms grew at 3.1% in FY23 and 2.8% on a four-year CAGR converting into real per-capita income growth of 1.7% per capita basis, ie. lowest in 40 years.
Additionally, the net-worth effect from the rise in stock market capitalisation has little impact on HH spending. And while government capex has a marginal positive impact on HH spending, it depresses HH savings significantly. The impact of higher real interest rates along with higher tax incidence from higher government capex is seen having a crowding out effect, rather than crowding in effect, as is commonly believed.
Third, latest annual periodic labor force survey (PLFS) 2022-23 reported a decline in the estimated unemployment rate falling to a 5-year low at 3.4%, -1 percentage points year-over-year. There is also a concomitant rise in the rate of people participating in the labour force (42.4%, +1.1 percentage points YoY, all age groups) and worker-population ratio (41.1%, +1.5 percentage points). However, the composition of these variables reflects the employment problem.
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The rise in worker population ratio (1.5 percentage points year-over-year), representing the employment rate, is significantly led by rural (+1.5 percentage points year-over-year), mainly the rural young cohorts with (+4.3 percentage points) and a contrasting trend of a decline in mature rural males (30+ years).
There is a sharp decline in rural males working in agriculture and services, and a rise in rural construction. Females have moved into agriculture both in rural and urban areas. Work in the overall better-paying urban areas has contracted, while it has expanded in lesser-paying agriculture and rural construction.
There has been 1.5 percentage points increased proportion of self-employment (57.3%) which is the residual impact of contractions in regular and casual work particularly in the manufacturing, urban construction, and services sectors along with a substantial decline in casual work in agriculture.
Accounting for the rise in ‘helper in household enterprise’, represented by forced self-employment in rural areas (largely unpaid labour), the estimated effective unemployment rate has risen by 0.32 percentage points year-over-year to 25.4% in FY23.
The proportion of workers engaged in agriculture rose again to 45.8% in FY23 (+0.3 percentage points year-over-year) versus 44% in FY18. The share for industry, including manufacturing, declined 0.2 percentage points year-over-year to 12.3% and so did the share for services (-0.7 percentage points year-over-year to 27.8%). Net of the rise in rural and decline in urban construction, the share of workers in construction increased to 13% +0.6 percentage points year-over-year).
Aggregating the incomes from regular (Rs 20,039 per month, 21% of workers), casual (Rs 8,547, 22%), and self-employment work (Rs 13,347, 57%) average per worker income based on PLFS is estimated at Rs 13,467 per month in FY23 or 5.9% four-year CAGR, translating into 0% growth in real terms (net of inflation).
The estimated 1QFY24 real earnings growth remained low at 2.9% year-over-year in sharp contrast to real private final consumption expenditure growth of 6% in 1QFY24 as per GDP data. Thus, there is a flagrant disconnect between the household situation as per the PLFS and the strong real GDP growth.
Exhibit 1: Overall worker earnings: Regular, casual and self-employed (4-year CAGR, %)
Source: PLFS, Systematix Research; average of 4 quarters ending 1QFY24; Proportion of Regular, casual, and self-employed earnings is 20.9%, 21.8% and 57.3% respectively.
There are some demographic dimensions as well. While the proportion of literates 2022-23 rose by 1.3 percentage points year-over-year, beyond the primary, the education levels have deteriorated across all categories. Also, the non-working (0-15 and 59+ years) to working age population (15-59 years) at 49.6% has risen by 5.4 percentage points over 2020-21.
Fourth, a recent NCAER (August 2023) survey-based report on food delivery workers showed that real incomes for mostly young urban cohorts contracted by 11% during 2019-22.
Lastly, a rising dependency ratio and fall in per capita income would impact investment in child education, spending on medical, and household financial savings, thereby impairing labor productivity and earning capability in the long term. The persistent worsening income situation and rising ruralisation implies that numerous claims of declining poverty are pivoted on thin ice.
In the near term, 2QFY24 results exemplify the household budget constraints imparting muted demand conditions for the whole gamut of consumer companies ranging from consumer staples, consumer discretionary, apparel, undergarments, organized retail, and consumer electricals, which comprise the fat lower arm of the K-shape. The upper arm is represented by relatively better the Auto sector and luxury consumption, which are also fuelled by leverage.
Exhibit 2: Real income of long shift food delivery workers
Source: NCAER Food delivery Platform Workers (2022)
Dhananjay Sinha is co-head of Equities and head of research of Strategy and Economics at Systematix Group.
