The recent GDP data seems to have reinforced the cheerful prognosis of the country’s economic prospects. After all, the economy has grown at an average of 8.2 per cent in the first three quarters of the financial year. But strip away product taxes and subsidies from the headline numbers and the underlying momentum in the economy does not seem as robust.
Value added by all the sectors in the economy has slumped from 8.2 per cent in the first quarter to 6.5 per cent in the third quarter, and may well slow down further to 5.4 per cent in the fourth quarter. The drivers of growth are not as strong as many believe.
Let’s take a step back.
In recent years, there have been three distinct drivers of the country’s growth momentum. First, during the pandemic-induced lockdowns, household savings in parts of the developed world, especially the US, had surged. These accumulated savings, supplemented by government transfers and loose monetary policies, helped stimulate the household demand for goods. As a consequence, global trade picked up pace. India’s goods exports rose to a staggering $422 billion in 2021-22, after averaging around $300 billion for many years prior to the pandemic.
Second, India’s services exports also began to accelerate during this period. Exports grew at 23.5 per cent in 2021-22 and 27.8 per cent in 2022-23, touching a record high of around $325 billion. This spurt wasn’t just driven by traditional IT services. Demand, especially from the US, increased for a wide gamut of services like professional and management consulting. The country also became a centre for global capability centres — these are primarily service delivery hubs for multinationals.
Third, these years also saw a wave of funding to startups. As per a report by PWC, Indian startups raised around $35 billion in 2021 and $24 billion in 2022. While there was a great deal of enthusiasm about the growth potential of these new-age tech companies, and the prospects of the Indian startup ecosystem, this funding boom was driven in part by the loose monetary policies pursued in developed economies, especially the US Federal Reserve.
This dramatic growth in exports and the country’s technology sector had knock-on effects on job creation and household income and as a consequence on consumption and investment in the economy. The Indian IT sector went on a hiring spree. Just the five major IT firms — TCS, Infosys, Wipro, HCL and Tech Mahindra — saw their employee headcount rise from 1.15 million in March 2020 to almost 1.6 million in March 2023.
A rapid increase in employment opportunities among the highly skilled led to a tightening of the labour market, causing wages to rise significantly in this segment. This, in turn, triggered a boom in investment (residential real estate) and consumption segments (passenger vehicles and other high-end goods and services) across cities that are more linked to the technology sector. It also led to a healthy growth in the government’s tax collections.
Now, each of these drivers of growth is closely intertwined with the US economy. Not only were goods exports more dependent on US households, but one could also argue that large parts of the Indian tech sector, the ones driving the formal economy, have, in a manner of speaking, detached themselves from the Indian economy and have joined the US economy, its labour market. After all, the services they export are majorly to US clients. And even for parts of the technology sector whose markets are located in India, for instance, the new-age startups, their funding, in large part, flows from US-based funds. So, the ups and downs of the US economy, its labour and consumer markets, and the stance of the Federal Reserve, deeply impact these segments.
As a consequence, changes in the US economy such as the drawing down of household savings and the tightening of monetary policy have impacted these drivers of growth. India’s goods exports have slowed down sharply, growing by just 6.9 per cent in 2022-23, and are actually 5 per cent lower this year (April 2023 to January 2024) when compared to last year. Services exports have grown at just around 6 per cent this year. Indian startups have been facing a funding winter with fresh flows declining to a mere $7 billion in 2023 according to reports. This weakness is reflecting in the broader economy.
In December 2023, the headcount of the five major IT firms was down to 1.53 million. There are reports of IT companies slowing down hiring. Reports also point towards the difficulties that engineering colleges and management schools are facing in student placements. As employment prospects get hit, so will household income and consumption. There may already be some indications. The average growth in home prices in 10 major cities has slowed down from 4.9 per cent in the first half of last year (January-June) to 3.7 per cent in the second half (July-December). Similarly, average growth in passenger vehicles was lower in the second half of the year as compared to the first half. Tighter domestic monetary policy could have also played a role.
As the economy searches for new drivers of growth, the government is caught in its own rhetoric. The contradictions are hard to ignore. If the underlying economic momentum is really as robust as is believed, if high growth is generating gainful employment opportunities for the millions entering the labour force, then why must the government provide free food to 800 million people? Why must it continue to drive the investment momentum in the economy? Why is private investment, both domestic and foreign, still tepid? And why is private consumption growing at just 3 per cent?
ishan.bakshi@expressindia.com
The writer would like to thank Josh Felman for his valuable inputs
India’s goods exports have slowed down sharply, growing by just 6.9 per cent in 2022-23, and are actually 5 per cent lower this year (April 2023 to January 2024) when compared to last year. (Representational Image) 
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