In a few days from now, the GDP estimates for the first quarter of the ongoing financial year will be released. The Reserve Bank of India has pegged growth for the quarter at 16.2 per cent in its most recent update. For the full year, it expects the economy to grow at 7.2 per cent, marginally lower than the International Monetary Fund’s most recent forecast of 7.4 per cent. These projections imply that over the course of these turbulent years, India will be one of the fastest-growing economies in the world. But, beyond the headline numbers, there are several contradictory impulses in the economy.
First, while the economy has surpassed its pre-pandemic level, the labour market, especially the informal segment, continues to be mired in distress. The clearest indication of the continuing stress comes from data on work demanded by households under MGNREGA. So far, in every month this year (April-July), the number of households demanding work has been significantly higher than those demanding work over the same period in the pre-pandemic period.
This heightened demand for work under MGNREGA indicates the continuing absence of more remunerative employment opportunities and points towards the persisting divergence between the formal and informal parts of the economy. For if both were growing at a similar pace then the labour market distress in both segments would have eased at a comparable rate. Further, these diverging trends also indicate rising productivity/growing capital intensity of production, which is more likely to occur among the larger firms in the formal sector. An obvious corollary is the continuing struggles of the micro, small and medium-sized firms which suggest that the labour market stress is unlikely to dissipate immediately.
Second, this continuing slack in the informal labour market reflects in subdued wage growth in this segment, even as there are signs of the labour market tightening at the other end of the wage spectrum in the formal segment. Data on rural wages shows that over the past year, wage growth across three principal occupation categories — general agricultural labourers, construction workers and non-agricultural labourers — has been lower than retail inflation. This translates to an erosion of the real purchasing power of households. Several firms have alluded to this trend in their quarterly earnings, pointing towards a drop in sales volume.
In direct contrast, reports of high attrition rates, despite record pay hikes in sectors such as IT point towards a tightening of the labour market at the other end of the spectrum. They also suggest a rise in the return to skill/higher education during this period, indicative of a deepening of the labour market dualism (at one end are the well-paid highly skilled/educated workers, while at the other are the low-paid semi- or unskilled, informal casual workforce).
Third, the lack of employment opportunities and subdued wage growth imply that household mobility continues to be adversely impacted, even as inequality is likely to have risen during this period. Put differently, as household movement up the income ladder has slowed down, the number of families in the higher spending cohorts isn’t increasing fast enough, even as the purchasing power of those in the top spending cohort has risen dramatically. Thus expenditure, especially on high-end discretionary goods and services, is growing at a fast clip, but overall consumer sentiment, as measured by the RBI, remains in the “pessimistic zone”, well below levels seen before the pandemic, as purchasing power remains subdued. Across various markers of upward mobility, there are indications to this effect.
As per data from SIAM, in 2021-22, sales of two-wheelers were roughly a quarter lower than their pre-pandemic level in 2019-20. Similarly, sales of entry-level cars are also facing headwinds, even as purchases of high-end cars (sedans and SUVs) are growing at a fast clip. As per CRISIL, cars priced above Rs 10 lakh (the premium segment) grew by 38 per cent last year, while those priced lower grew by a mere 7 per cent. A similar trend seems to be playing out in residential real estate. As per data from JLL, in seven cities (Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai, and Pune), in the first six months of the year (January-June), real estate transactions above Rs 1.5 crore grew at more than twice the pace of those below Rs 50 lakh. In fact, during this period, the number of transactions above Rs 1.5 crore was more than half of the volumes seen in the Rs 50 lakh category.
Fourth, at the firm level too, these contradictory impulses can be observed. Corporate profits are at record highs even though business sentiment, as measured by the central bank’s business assessment index, is lower than what it was around a year ago. A possible explanation for these opposing trends is that even as the larger formal firms have gained market share at the expense of the smaller players, subdued employment prospects and sluggish wage growth imply that the overall size of the market isn’t expanding as hoped.
Thus, despite the central bank’s surveys showing that capacity utilisation rates have risen to levels exceeding their long-term average, there aren’t enough concrete indications of a broad-based pick-up in private investments across a range of sectors. Investment activity, as proxied by bank credit (adjusting for lower inflows from bond and commercial paper issuances) and internal accruals (there are reports of higher dividend payouts by firms) remains subdued. Firms seem to be hesitant to commit to fresh investments.
Thus the granular picture that emerges is of a continuing deficit in employment opportunities and subdued wage growth; of limited mobility and rising inequality; of pessimistic consumers and uncertain business prospects. This implies that economic activity is not as ebullient as many would believe. To what extent these contractions deepen or get resolved will determine the country’s medium-term growth prospects.
This column first appeared in the print edition on August 29, 2022, under the title, “Not so