Prime Minister Narendra Modi normally does not offer his comments on quarterly GDP data. In fact he prefers to stay away from saying much on the economy which he probably realises is the Achilles’ heel of the NDA’s 10 year rule. It is very difficult to build a rosy narrative on the economy when long-term data or even experience on the ground doesn’t support it .
Yet he chose to take credit for the unusually robust GDP growth of 8.4% in the 3rd quarter of 2023-24. This was quickly followed by commentaries from establishment economists that the economy is poised for an unprecedented take off.
However, the official narrative is plagued with too many contradictions to support the claims of a big take-off. The primary contradiction that has emerged like the proverbial elephant in the room is that the GDP growth data is not supported by private consumption growth at all.
There is a broad consensus among both economists and industry representatives that private consumption growth remains very tepid, at 3 % for 2023-24.
There is a clear mismatch between GDP growth and private consumption.
For 2023-24, GDP growth is officially projected at 7.6% but consumption growth is just about 3%.
Well known economist and former Chief Statistician of India Pronab Sen told me that normally consumption growth numbers correlate very closely with the GDP growth figure. He says if GDP growth is X percent then consumption growth can at most be 0.5 to 1 percentage points less than X.
This means if GDP growth is 8.4 % for the 3rd quarter of 2022-24 then consumption growth should be at least 7.4 %. But official data shows trend consumption growth only at about 3%. This major contradiction remains unexplained. Experts say the private sector will not start investing in fresh capacity if consumption growth is so tepid. Industry does not look at headline GDP growth numbers but at consumption demand before deciding on fresh investments. No wonder large Indian consumer companies like Hindustan Unilever and Bajaj Auto have been expressing worries about the lack of meaningful growth in consumption demand. Recently, the head of retail company Shoppers Stop told CNBC that sales have been flat in recent months.
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Economists have tried to speculate why the consumption growth rate remains only about half of GDP growth. Their conclusion is that GDP growth is overestimated.
Recently, the much touted NSSO survey on private consumption expenditure also shows a very discouraging growth of 3% over 11 years. During this period, GDP growth has been roughly 6%. Again, there is a huge gap between GDP growth and consumption growth.
Economists like Arun Kumar, Arvind Subramanian, Santosh Mehrotra, and Ashoka Mody have broadly argued that India‘s GDP growth or national income growth measured on the basis of output data does not square with the consumption expenditure at all. They feel that GDP is clearly overestimated. Simply put, higher income growth must be accompanied by higher consumption or higher savings. It can’t be that incomes are rising but both consumption and household savings are stagnant. This math doesn’t work.
Pronab Sen says this situation might have accentuated post-Covid, when we saw a K shaped recovery with the organised sector doing well but the unorganised small and medium industry losing steam. The output data system in India extrapolates the organised data for the vast unorganised sector also. Normally both should grow together. But after demonetisation, and more so post-Covid, there might be a big divergence between the organised and unorganised sector output growth. The K shaped recovery is a consensus view even among equity researchers in Mumbai. Only the government is in denial about this.
The data on low and inadequate consumption growth is also borne out by official data on wages of regular and casual workers over 2017-18 to 2022-23, which shows a decline in real terms.
There are too many pointers to the big gap between consumption growth and income/GDP growth. Pronab Sen says the consistently low trend growth in private consumption growth is very worrying.
It may thus be too early to celebrate a robust turnaround in the economy even if Modi is tempted to do so in his election campaign.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.
