Autumn Number 2019

Growth And Stagnation

Modi and the End of Economic Resurgence

Sushil Khanna & Mritiunjoy Mohanty

For several months now the Indian economy has been in a grave crisis as the slowdown of the last half-decade or so has deepened.According to some estimates the economy is probably back to growing close to the 'old Hindu rates of growth'. To some extent the slowdown gets hidden in the confusion surrounding measurement of growth rates, thanks to the stratagems of the Modi Sarkar and subversion of the statistical establishment. But whatever be the growth rate that the government wants to latch on to, it (the slowdown) is now so widespread that it is impossible to deny: from capital goods and infrastructure sectors, to consumer goods and automobiles almost all segments of commerce and industry face declining sales and massive layoffs. The slowdown in automobile sales is historically unprecedented as majors have had to cut back production in the face of inventory pileup with dealers some of whom have gone bankrupt.

According to market researcher Nielsen, the slowdown in FMCG sales is led by rural demand ('FMCG companies red-flag gathering rural demand', The Indian Express, 15.08.19). Unemployment is at an all-time high and about a hundred thousand workers have lost jobs in automobile industry alone while millions of jobs have been destroyed in housing and construction. Little wonder then that SBI research reports that both urban and rural wage growth has decelerated from growing at double digits in nominal terms to single digits ('FMCG companies red-flag gathering rural demand', The Indian Express, 15.08.19). The same report also says that rural wages are decelerating twice as fast as urban. According to RBI's Annual Report 2017-18, capacity utilisationin the last several years has remained stubbornly and significantly below its long-term average. Even the stock market that had boomed to a new high on Modi's victory for a second term, is now in despair caught between a gloomy international economic environment and the government's economic policies.

The deepening of the slowdown in India comes at a time when the global economic environment too has turned adverse. The trade dispute between China and USA, combined with depreciation of Chinese currency, along with Brexit and its impact on European trade, has vitiated India's export possibilities. Exports, have for last few years have been stagnant or contracting. Except for 2018-19, when exports rose. But even this has to read in context: with Germany entering a recession and the on-going trade wars markets have already begun pricing in a global economic recession.

Despite, declining growth and contracting employment, the Modi-Shah juggernaut thas won a handsome victory in the recent parliamentary election. The charisma of the great leader seems to be immune to economic mis-management and a deepening crisis. As long people can be mobilised to hate an enemy, real or imaginary, within and on our borders, the duo seem to be impervious to the vagaries of a sharply slowing economy and associated closures and job losses.

Whatever be the political fortunes of the teflon-coated duo the crisis has decimated the livelihood of millions who in this New India neither have the wherewithal nor the safety net to withstand it. How did this come to pass? To understand, it is important to go back to the decade long period of rapid economic growth that catapulted India into the league of rapidly growing East Asian economies like China and Korea. The recent slowdown and stagnation has to be analysed as a result of some macro-economic policies that have undermined this growth impulse.

Indian Economy In 1990s
One must recall that despite the claims of neo-liberal economists keen to dismantle the old regime of planned development, the decade of 1990s, (1991-2000) was a period of relatively slow growth. During the period, GDP growth was 5.7 percent per annum (average for 1990-91 to 2000-01), a little lower than the growth in the five years preceding the so-called big bang reforms. One reason for this was that reforms did not lead to an acceleration in investment growth and capital formation. In addition the Narsimha Rao government and the successive governments that followed, were keen to undermine the role of public sector, which had been a major site of investment and capital formation. Though these governments,both Congress and NDA, began the process of disinvestment and opened up different segments of the economy to private investment, actual private investment in most sectors remained shy. With the exception of telecom, there was hardly any new investment in infrastructure industries like power, mining, highways and roads etc. Declining public sector investment with sluggish private corporate investment meant that the economic growth was lack-lustre in 1990s despite reforms.

As Table 1 below shows, the period till 2002-03, was a period of relatively low GDP growth partly due to sluggish investment in the economy. Then from 2003-04, the Indian economy inaugurated a new phase of rapid growth hovering around 9 percent per annum. This was accompanied by rising investments in the economy, with fixed investment growing at 15 percent p.a. during the period. The investment ratio of the Indian economy, (defined as ratio of Gross Capital Formation to GDP) which all through 1990s and up to 2002-03 hovered around 25 percent of GDP, rapidly rose under UPA-1, to 32 percent in 2004-05 and continued to rise touching nearly 40 percent by 2007-08. Despite the shock to the global economy due to financial crisis of 2008 Investment level continued to hover around 38-40 percent level till 2011-12. Thus the period of India's accelerating growth which coincided with the regime of UPA-1 and most of UPA-2, was made possible by rising savings and investment in the economy in the context of a global economic boom and relatively cheap credit.

As Table 2 demonstrates, the high growth phase was characterised by high investment and savings ratios with a current account almost in balance. During the rebound from the Financial Crisis of 2008, both average investment and savings ratios rose, but with the former rising much more than latter, leading to unsustainably high current account deficits (due to rising oil prices and capital goods imports) and rising inflation indicating an overheated economy. The growth slowdown that follows is characterised by much lower inflation levels and a more sustainable current account deficit but also sharply lower investment and savings ratios. Therefore, macroeconomic stability has been bought at the cost of a decline in both investment and savings ratios. As Table 2 demonstrates, the investment-saving slowdown deepens during the NDA-2 regime, suggesting an inability to reverse the trend.

Even as it inherited a slowing economy, there were many positives in the economic conjuncture for Modi Sarkar in 2014. Firstly, the oil prices began to decline due to increasing availability of shale oil. Thanks to this, India's current account deficit contracted to manageable levels of about 1.2 percent of GDP. USA, the largest market for petroleum, became self-sufficient with increased shale oil production. Thanks to this and decline in other commodity prices, inflation which touched 8-10 percent in the last two years of Manmohan Singh's government, declined to about 4 percent. Indian exports in 2014 touched a new high of 301.4 bn dollars. Yet despite all these favourable factors, the NDA—2 under Modi was unable to revive growth. One reason was Modi government's initial reluctance to use public sector and public spending to boost demand. The other was tight monetary policy and reclassification of NPA norms both of which made credit expensive. On top of this there is little doubt that Modi government's decision to demonetise the Indian currency in November 2016 structurally damaged an already declining economy, deepening an already unprecedented investment saving slowdown. Purely in economic terms, this big bang reform could not have chosen a worse moment for its implementation.

The Economic Survey's View Of The Slowdown
The Annual Economic Survey 2017-18 of the Government of India notes that "As a result, the current slowdown—in which both investment and saving have slumped—is the first in India's history." (p47) "In other words, India's current investment/saving slowdown episode has been lengthy compared to other cases—and it may not be over yet." (p48) "Cross -country evidence indicates a notable absence of automatic bounce-backs from investment slowdowns. The deeper the slowdown, the slower and shallower the recovery." (p53) [emphasis added] So clearly this is way more serious than your garden variety downturn.

To understand the characteristics of this slowdown GOI's Central Statistical Organisation's (CSO) categories have been used. Until recently the CSO's National Account Statistics defined three kinds of non-financial institutions in the investment-saving domain—public sector (Pub); private corporate sector (PC); and the household (HH) sector—and that definition stands. It is important to note that the HH sector includes, besides households, unincorporated enterprises (micro and SME sector) as well. Using the above categories Table 3 below details the evolution of investment and saving ratios. In the table, I refers to gross investment and S to gross saving.
What Table 3 tells that both in savings and investment, the Household sector (which also includes millions of unincorporated tiny enterprises) plays the most significant role, as it accounts the largest share of both savings and investment in the Indian economy.

As Table 3 also elucidates, the investment ratio declined by more than 6.5% and the savings ratio by more than 4%. But this decline in investment-saving ratios has been asymmetrically shared across segments. For both investment as well as savings ratios the bulk of the slowdown has been borne by the household (HH) sector. Out of the decline of 6.5% in the investment ratio, more than 5.5% was borne by household (HH) investment. Whereas the savings ratio declined by more than 4%, household (HH) savings ratio actually declines by 5.4%! Which is to say other segments (private corporate (PC) sector) have improved their savings performance while the household sector has been squeezed.

The Household sector played an important role both in the investment surge during 2004-08 period, accounting for some 40 to 45 percent of all investment in the economy. After the global crisis and decline in exports, when private corporate investment growth began to decline, household sector filled the gap. But after the demonetisation and resulting complete shutdown of the economy for 4-5 months, all currency disappeared and economic transactions in an under-banked economy came to a halt. As people have already noted, the Household sector is where bulk of small and tiny enterprises, both in manufacturing and trade and distribution, are concentrated, accounting for the bulk of jobs and value addition. Intended or not, demonetisation effectively became an attack on this sector and crippled such enterprises.

Several studies and surveys of trades and industries adversely affected by demonetisation show that many of these firms have eroded their capacity to invest or are crippled with debts. The shutdown due to demonetisation, forced many small entrepreneurs to use their working capital to meet essential expenses, including consumption (see Dewan etc.) severely eroding their capital base. Demonetisation also crippled the real estate and construction sectors, bulk of which is unorganised with small contractors accounting for the significant part of construction activity. This explains the sharp decline in household savings and investment (Table 3). If demonetisation disproportionately affected informal enterprises both urban and rural, it also affected the other big cash user, agriculture, as well. When one combines agriculture and rural non-farm enterprises, demonetisation disproportionately affected rural India. Little wonder then that rural wages are decelerating twice as fast as urban.

If the above scenario is reasonably accurate, and one thinks it is, then India is in for a prolonged period of low and declining growth. It is not easy for formal banking channels to re-capitalise or fund such small enterprises. Even during the Indira Gandhi era of social banking and loan melas, little banking credit reached such tiny enterprises. In today's world, where banks are already grappling with large scale corporate failures and collapses, it is unlikely they will be willing to assist what are considered as high cost and risky customers. And the ongoing NBFC crisis only makes matters worse.

To sum up, the brunt of the unprecedented investment-saving slow-down which the Indian economy is currently undergoing has been borne entirely by the household (HH) sector, which itself is unprecedented. It is important to stress in this context that the HH sector also incorporates, besides households, unregistered and informal enterprises. Second, during the slowdown, corporate profitability, as measured by retained earnings, has remained quite robust allowing the private corporate sector savings ratio to rise. Therefore if private corporate investment has been comparatively less robust and it too has slowed down in the last couple of years, it is certainly not because they have been strapped for funds. Third, the first three years of the NDA-2 government exacerbated the slowdown it inherited through tight monetary policy and demonetisation was the final nail in the coffin. Fourth, the NDA-2 government has tried to use public sector investment to revive animal spirits but it has made little dent in declining Household (HH)investment. And the longer the slowdown lasts, the more entrenched it becomes in terms of expectations and more intractable.Having created this mess the government it seems has few options open to it in terms of getting out, other than trying 'nudge' the economy. But 'nudging' might find itself unequal to the task in the face of entrenched expectations. Finally, if the private corporate sector remains profitable and the small and medium enterprise in the informal sector gets wiped out, it does not take rocket science to deduce whose interests this government is serving.

Table 1: Average annual GDP and fixed investment growth rates (%)

Real GDP

Real fixed
investment growth


Source: based on data from Mundle Committee Report
Note: all growth rates calculated at constant 2011/12 prices

Table 2: Period averages for Current Account Balance, I-S ratios across political regimes (%)

Political regimes



Source: based on data from IMF World Economic Outlook, January 2018
Note: notes to Table 1 are applicable here as well.

Table 3: Investment Saving ratios (current prices)

Gross Investment Ratios (%)
Gross Savings Ratios (%)


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Autumn Number 2019
Vol. 52, No. 13 - 16, Sep 29 - October 26, 2019