Weak consumption to hinder growth, private capex and jobs

Few are aware that the MoSPI has released (without a date stamp) a detailed report, “Survey on Household Consumption Expenditure: 2022-23” – after a brief note was released on February 24, 2024 (then called “Household Consumption Expenditure Survey (HCES)”. The latter had led to claims that poverty had declined to “single digit” (Centre, NITI Aayog and SBI).

The detailed report creates new revelations and doubts. The most significant part reads: “The median level of rural MPCE has been about ₹3,268, i.e., half of the rural population belongs to households with MPCE below this level. In urban India, the median level of MPCE is about ₹5,286 indicating that half of the urban population has MPCE below this level. About 62.6% of the rural population of India has MPCE below the rural average of ₹3,773 and 64.5% of the urban population has MPCE below the urban average of ₹6,459.”

Two particular segments here need close attention because they explain why consumption demand is muted, despite high (“gangbuster”) GDP growth (PFCE growth falling to 4% while GDP growth jumped to 8.2% in FY24): (i) “about 62.6% of the rural population of India has MPCE below the rural average of ₹3,773” and (ii) “in urban India, the median level of MPCE is about ₹5,286 indicating that half of the urban population has MPCE below this level”.

Since India doesn’t have a poverty line (after the Tendulkar’s 2004-05 line) and the Centre has not set a new one despite a decade-old assurance to the Parliament, consider the World Bank’s “extreme poverty line” of $2.15 per day (2017 PPP) – that is, ₹5,353 per month (at ₹83).

Two assertions can be safely made for 2022-23:

·    More than 62.6% of rural population was ‘extreme poor’ – their MPCE of ₹3,773 being way below ₹5,353.

·    50% of urban population was ‘extreme poor’ – their MPCE of ₹5,286 being below ₹5,353.

This is not surprising. Households are facing a severe income crisis – lowering consumption demand. The National Accounts Statistics for FY23, released on May 8, 2024, had revealed: (i) net household savings (physical and financial savings minus liabilities) fell to 18.4% of the GDP in FY23 – from 20.1% in FY22 and 22.7% in FY21 (ii) net financial savings plunged to 47-year low of 5.3% in FY23 – from 7.3% and (ii) financial debts nearly doubled to ₹15.6 lakh crore in FY23 – from ₹8.99 lakh crore in FY22. (Disaggregate household data for FY24 will be released next year.)

The key root causes are also known: Triple shocks of demonetisation, GST and Covid-19.

Supply-side solutions for demand-side problems

The budget speech mentions “demand” 12 times – but all relating to tax litigations. Ironically, the Economic Survey of 2023-24 (which flagged the need for 7.8 million jobs a year in non-farm sectors until 2030) also missed it and said, instead, that 8.2% growth in FY24 was “driven by stable consumption demand and steadily improving investment demand”.

For the first time in May 2019, The FinMin’s monthly report (MER) had admitted that the main engine of growth (consumption/PFCE) had sputtered. Other two powerful growth engines, private investment and exports, had long collapsed and the only engine working was the weakest one – government capex (7.6% of GDP in FY19).

But neither the interim budget nor the full budget of 2019 took note of it. By then, the GDP growth had crumbled to 6.8% (FY18), from 8.3% (FY17) and the PFCE growth had fallen to 6.2% (FY18), from 8.1% (FY17). Such was the disappointment in that phase that a business editor wrote, there were “only 3 ways to turn around the economy – consumption, consumption & only consumption”, adding that the two successive finance ministers, Piyush Goyal and Nirmala Sitharaman, had “missed golden opportunities to revive the consumption cycle”.

In Budget 2024, the attempt is to do more of the same by raise government capex (GFCF) and more incentives to private industry. The budget proposes abolition of angel tax, expansion of VGF (apparently to non-road sectors), “simpler tax regime” for foreign shipping companies, “safe harbour rates” for foreign mining companies, tax cut for foreign companies from 40% to 35%, “simplified” rules and regulations to “facilitate” FDI inflows and cash incentives for jobs like, EPF contributions and internships. etc.

These are all supply-side solutions to a demand-side problem – as was the case in 2019 and in the intervening period.

Unless demand rises, private investment will not return nor more jobs be created – growth will be driven by the weakest engine. The RBI’s latest report shows, capacity utilisation (CU) averages 74.1% in the three quarters of FY24 (up to which data is available) – even less than 75.2% in FY19. The Kantar’s Brand Footprint India report of 2024 shows, consumption growth fell across sectors, except dairy, in 2023 – FMCG (from 8% to 7%), food (from 15% to 14%), homecare (from 7% to 3%), health and beauty (from 2% to 0%), beverages (from 22% to 13%) and dairy (up from 3% to 5%). This took overall consumption growth down to 7% – from 8% in 2022 and 10% in 2021.

There is no point blaming corporates for not investing more or creating more jobs despite “swimming in profit” (Economic Survey 2023-24) or private banks for not lending enough to corporates (DFS Secretary Vivek Joshi, July 26, 2024).

Once consumption demand is strong, private investment and jobs will come on their own.

How to rev up consumption?

Reving up consumption is no rocket science. Here are a few suggestions for immediate action:

1. Bring sanity to resource allocations: Agriculture gives 45.8% jobs (PLFS 2022-23) and sustains 54.6% of population. But the budget allocation for agriculture is 3% and rural development 5.5% (including 1.8% for MGNREGS) of the total outlay. This is an old trend which needs to be abandoned. No wonder, agriculture’s GVA share is 14.5% in FY24 (P).

2. Scale up funding for MGNREGS: It is the only jobs scheme that has delivered since 2005. But it is emergency relief and provides menial low-wage (₹241 for FY25) work. In less than four months of FY25, 131 million are registered “active workers” and 37.3 million households have availed this work but, against the promised 100 days of work, the average for past five fiscals is 50 days. It continues to be under-funded since FY15, despite high demands. Higher wages and 50 additional days of work will raise rural income. Long-run goal would to develop proper policy for generating employment (pending for more than a decade).

3. Disclose unfilled vacancies in central government ministries and bodies under its control: The Centre hasn’t disclosed it, the Congress manifesto said “nearly 30 lakh vacancies in sanctioned posts” remain unfilled. How many vacancies “rozgar melas” started in 2022 to fill 1 million jobs is not known. Filling government vacancies will raise incomes of millions.

4. Revert back to regular appointments in defence services: The Agnipath-Agniveer scheme was top-down and political. There was no consultations with the defence forces – and later confirmed by then Army chief General MM Naravane in his forthcoming book, which said the scheme came as “surprise” for the Army and “a bolt from the blue” for the Navy and Air Force. Instead of continuing to defend it or announcing quotas for the retired Agniveers (75%), restoring regular appointments would give long-term job security and incomes (apart from other benefits like ensuring national security and social peace).

5. Make freebies to manufacturing accountable: From tax rate cuts to tax holidays, special tax rates, exemptions, deductions, rebates, deferrals, cheap land, electricity, water (SEZs) and also PLIs, DLIs, VGFs, EPF reimbursements, internship support etc. manufacturing has it all for more than 75 years. Yet, manufacturing has failed to generate jobs (its job share fell to 11.4% in 2022-23, from a modest 12.1% in 2017-18, as PLFS of 2022-23 shows) and to generate income (GVA share of 17.3% in FY24). This money could be better used to revive informal, labour intensive non-farm enterprises, specifically micro and small units of MSMEs (thereby reducing burden on agriculture), which were hit the hardest by the triple shocks. They have, historically, provided more jobs and incomes than manufacturing.

6. Review incentives for exports of merchandise goods vis a vis to services exports: Just like manufacturing, incentives for export of merchandise goods (refunds and incentives under GST, SEZs, EOUs, Deemed Export Benefit Scheme, Advance Authorization Scheme, Duty Drawback, DFIA, ECGC, MEIS, RoDTEP, RoSCTL, EPCG, PLIs etc.) haven’t delivered for decades. Merchandise export generates trade deficits. Instead, shift these to services exports (only two schemes for it, SEIs and EPCG). Services exports is driving exports and generating surpluses. Besides, services sector is Number 1 in income (GVA share of 54.6% in FY24 without construction) and Number 2 in jobs (historically and now). It is also “more labour intensive than manufacturing or mining”. Such a shift will create more income and more jobs.

7. Stop writing off NPAs of big corporate loan defaulters (₹14.5 lakh crore during FY15-FY23), many of who have fled India with the bank loans. Write-off loans of highly indebted farm and non-farm households instead to improve consumption. Besides, the Economic Survey of 2023-24 said corporates are “swimming in excess profits” but their “hiring and compensation growth hardly kept up with it”.

8. Universalise minimum wages and social security. Central minimum wage remains stuck at paltry ₹176 since 2017 and 88.7% of workers are without social security cover (PLFS of 2022-23). Implementing the new labour codes of 2019 and 2020 – which promises universal minimum wages and social security – millions of workers, including gig and other informal workers, would get better income and financial security.

9. Use ₹2 lakh crore earmarked for internships (₹93,000 crore) and EPF support (₹1.07 lakh crore) for FY25 for formal sector to support informal sector entities and workers. Formal sector is not creating jobs and would do even less because of rising capital-and-tech intensity.

10. Pull back from “national champions” model (short for crony capitalism) – which had failed during the “license-permit raj” and continues. It harms all other enterprises by distorting the playing field; distorts policies (like overnight ban on imports of laptops/PCs in 2023); causes inflation through predatory pricing and profiteering (by Big 5 and others). Market concentration is making new highs in FY24 (Herfindahl-Hirschman Index (HHI) in telecom, airlines, cement, steel and tyres).

Long-term solutions

11. Revive now-abandoned manufacturing policy draft circulated in December 2022 for reimagining support systems for manufacturing to deliver jobs and incomes. This will also prevent wastage of resources directed at a select few.

12. Progressive taxation: The current one is entirely regressive and adds to poverty, hunger and inequality. The gap between direct and indirect tax collections closed down to 2.1 percentage points in FY20 but soared again. Corporate tax collection was 1.6 times more than that of income tax in FY14 but has fallen below it in FY22, FY23 and FY24 and will fall in FY25 (BE). The budget’s minor tinkering in income tax rates (which the FM said would save “up to ₹17,500) will benefit about 1% of population or less – because as a Lok Sabha answer of July 24, 2023 showed, out of 74 million filing ITRs for FY23, 51.6 million (70%) declared zero-taxable income. Actual tax payers were just 22.4 million (1.6% of population). The real elephant in the room is indirect taxes like GST, oil taxes, excise etc. – which is paid by all Indians, including the ‘extreme poor’. Then, tax will be income-compliant and obey the cardinal principles of ability to pay and equity.

13. Recast 2011-12 GDP series. Former CEA Arvind Subramanian and other economists like Ashoka Mody have repeatedly flagged that the GDP growth is exaggerated by 2.5-3 percentage points. Josh Felman and Arvind Subramanian wrote on July 19, 2024 that the only explanation for “three macroeconomic puzzles” – “soft” consumption, “weak” jobs growth and “low” core inflation while the GDP growth is “gangbuster” – is because “growth is actually modest”. Add two more to the list: sluggish private investment and 1.6% population paying income tax in FY23.