A different economic question

The government seems to have placed the blame for what it believes to be a cyclical slowdown largely at the door of the RBI, shrugging off its responsibility in steering the economy. The central bank does indeed share the blame for the slowing momentum — it had till very recently kept the rupee from finding its true level, thereby eroding export competitiveness, and continues to keep monetary policy excessively tight. But the problems facing the economy run deeper. It’s not something that can be fixed by lower interest rates alone. This is why the rupee’s weakness this time around is different from earlier episodes, such as the financial crisis of 2008 or the taper tantrum of 2013.

The problem is structural and distributional. The evidence is clear.

The high growth rates seen in the aftermath of the pandemic were driven in large part by the surge in services exports, specifically, the boom in Global Capability Centres (GCC). The knock-on effects of which were felt in residential real estate, passenger vehicles and other high-end goods and services. This helped push up the aggregate growth numbers, papering over the weakness in large parts of the economy.

However, this growth structure is biased in favour of the highly skilled who account for a very small section of the labour force. Pathways for upward mobility are thus more accessible to the highly skilled, limiting the expansion of the cohort with greater discretionary spending capacity. Put differently, with not many moving up the income ladder, the overall consumption base hasn’t been growing fast enough. And with the GCC boom now stabilising at lower levels, the faultlines in the broader economy are now more visible, reflecting also in the aggregate data.

Limited upward mobility has, however, been a feature of the Indian economy, reflecting the inability to generate more productive forms of employment for the vast majority of the labour force. But mobility seems to have become more restricted since the pandemic. Arguably, the clearest evidence of this can be found in the car market, specifically, the low-priced, small car market — a marker of middle-class status.

Take the sub Rs 10 lakh segment. Cars in this segment are typically bought by first-time users or those upgrading from two-wheelers or used cars. In 2014-15, this category accounted for 73 per cent of all cars sold in the country. Sluggish sales meant that by 2019-20 the segment’s share had dipped to 65 per cent. The decline thereafter is more stunning. By 2024-25, the category accounted for just 46 per cent of all cars sold (Data has been sourced from Crisil). In the case of Maruti Suzuki, in the first half of this year, sales of its mini and compact cars were lower than in 2017-18.

Simply put, there aren’t many new buyers for low-priced small cars. This hollowing out of consumption is not just limited to the passenger vehicle segment. The emphasis on “premiumisation” is nothing but an admission by the corporate sector that the overall market isn’t expanding fast enough, just the top consuming cohort is.

The labour market is just not providing enough productive employment opportunities nor are real wages growing at a fast clip. With fewer people moving up the income ladder, broader consumption demand isn’t growing rapidly.

While millions more have joined the workforce, more are now self-employed, either as unpaid help in household establishments or in one-man roadside shops or in agriculture. Informal establishments and employment continue to witness a steady expansion, indicating the absence of alternatives. All these numbers should have been going down if the economy was generating more productive job opportunities. Formal employment, as per the EPFO payroll data shows, remains driven by expert services, which are nothing but manpower suppliers, normal contractors, and security services — segments that don’t require high-skill levels.

The fallout of limited job creation and muted wage growth can be seen in the greater recourse to debt. Household debt had risen to 43 per cent by June 2024. While this may well be lower when compared to other emerging economies, it must surely be of concern that not only is the share of loans being taken to finance consumption rising, but roughly 60 per cent of those taking personal loans in the second quarter already had more than three live loans. So, not only are more households taking debt, they are also taking on more debt. But even this debt surge has failed to boost overall consumption significantly.

With little demand visibility and uncertainty over government policy, investment activity continues to remain subdued. New project announcements have slowed down as per CMIE. FDI remains below recent highs. When a usually reticent India Inc. questions the growth numbers and speaks of a shrinking middle segment, the situation is likely to be grim. While the corporate sector is being repeatedly prodded to invest and take risks, if the ruling dispensation itself does not take any — almost 11 years into government — then who is more risk averse? In the era of industrial policy and PLIs, perhaps the pivot of one of the largest business houses in the country — from the industrial sector to services — suggests something.

ishan.bakshi@expressindia.com