Politicians constantly talk about India being a young country, since two-thirds of the population is under 35 years of age and half of it below 26. Some economists consider this an automatic boon for the economy, since there is a limitless number of workers who could contribute to India’s productive capacity.

Finance and investment giant Morgan Stanley, in a report released in November, identified this productive potential as the reason for “this decade being India’s decade”. But its projections may be too optimistic.

Not much cause for optimism is offered by the four engines of growth – private final consumption expenditure, private investment, government expenditure and net exports.

Nearly 58% of India’s gross domestic product, or GDP, is accounted for by private final consumption expenditure on individual needs. However, since demonetisation in November 2016 – when Rs 500 and Rs 1,000 currency notes were declared invalid – consumption expenditure has been tepid, as job growth fell sharply.

No wonder that in 2017-’18, when the Union government released the Periodic Labour Force Survey data, unemployment had reached a 45-year high of 6.1%. In 2012, it was only 2.1%.

In fact, the growth of non-farm jobs fell to 2.9 million per year between 2013 and 2019, a dramatic drop at a time when five to six million new young people were looking for work each year. By contrast, 7.5 million non-farm jobs were being created each year between 2004-’05 and 2011-’12, according to data from the National Statistics Office.

Private final consumption expenditure per capita depends mainly on the prevailing employment situation and expectations of jobs in the future. In 2021-’22, it had dropped to 5% below 2019-’20 levels,

Like consumption, private investment, which is the second-most important driver of economic growth after private final consumption, also depends significantly on expectations of consumption growth at the present moment and in the future.

Total investment inherited by the current government was 31.3% of the GDP in 2013-’14, according to the finance ministry’s economic survey 2018-’19. It fell to 29% of the GDP in 2018-’19 and 28.2% in 2019-20 before the outbreak of the Covid-19 pandemic.

It decreased further during the pandemic: in nominal terms, it was 27.1% in 2020-’21 and 29.6% in 2021-’22 as share in GDP (higher in the financial year 2022 only because there was a rebound after pandemic contraction on a practically stagnant GDP over the preceding three years taken cumulatively).

The Covid-19 years also saw a fall in capacity utilisation, which Investopedia explains is the measure of the potential output of a company that is actually being realised. In India, capacity utilisation in the manufacturing sector had been running just below 70% before Covid-19 and fell to 60% in July 2021.

Although it has been gradually climbing since then, it still stands at 74% – not sufficient to encourage private firms to initiate new investment (or new hiring on the scale required to absorb the newly minted jobseekers).

Most non-farm jobs in India are generated by Micro, Small and Medium Enterprises, or MSMEs, but expectations for this sector are even lower. MSMEs took a heavy beating from demonetisation, as most of their working capital is in the form of cash. With 86% of the currency declared invalid overnight in November 2016, thousands of MSMEs simply closed down, never to reopen. It set in motion the fall in growth for nine quarters all the way to the start of the pandemic lockdown on March 25, 2020.

Expectations about future consumption demand can be gauged from Figure 1 and two other factors. The first is open unemployment, when an educated person seeks work but is unable to find it. Figure 1 shows that consumption demand from a youthful population is likely to remain tepid.

Credit: Author's estimate based on data from the National Statistical Office, Periodic Labour Force Survey and other datasets. According to the Ministry of Statistics and Programme Implementation, UPSS – a measure of employment – refers to Usual Principal Status and Subsidiary Status, which considers a person as employed if they have engaged in an economy activity for 30 days or more in the preceding 365 days.

In addition, open unemployment among India’s youth (15-29 years of age) has shot up. Overall, it increased to 16% in 2019 from 6% in 2012. Second, the higher the education level, the higher the unemployment level. About 80% of India’s 15-16-year-olds have received secondary education, but their unemployment rate is 10%. For graduates, it was 20% in 2012, but has increased to over 30% before Covid-19. Postgraduates fared worse, with their unemployment level doubling.

It does not appear that formal or vocational education or training helped much either, despite the government’s much-vaunted Skill India initiative. Technical training also provides little guarantee of a job. Unemployment increased from 18% to 28% for those with technical education below graduate level and from 20% to 35% if technical education was till graduate or a higher level.

Another reason why future consumption demand is likely to remain tepid is that the share of the working-age population that has jobs has fallen consistently from 2016 to 2022. The employment rate fell to 36% in 2022 from 43% in 2016. This was a 7% fall in the employment rate in a country that has the largest young population in the world.

This employment rate is much lower than the world average of about 60%. With the employment rate falling, the number of “discouraged workers” – those not even looking for employment – keeps growing.

The third reason why consumption has been low, and is likely to remain low, is that the wages of those employed have remained stagnant for casual/regular wage workers. For the self-employed, earnings have fallen from Rs 429 to Rs 411 per person per day from 2017-’18 to 2020 (as estimated from the employment data of the National Statistics Office).

Under such circumstances, the optimistic scenario put forth by analysts such as Morgan Stanley that “India’s GDP could more than double from $3.5 trillion today to surpass $7.5 trillion by 2031”, appear unfounded.

India’s current GDP is $3.2 trillion, not $3.5 trillion. If it is to even double to $6.4 trillion, it requires a growth rate of 8.75% per year from 2022-’23 to 2031-’32.

India has not achieved such growth in the past eight years. In fact, in the last three years (2019-’20, 2020-’21, 2021-’22) the average growth rate has been 2.5%, far short of the 7% that the country considers to be its growth potential.

“Measured relative to 2019, GDP today is just 7.6 percent larger, compared with 13.1 percent in China and 4.6 percent in the slow-growing United States,” noted former Chief Economic Advisor Arvind Subramanian and former International Monetary Fund official Josh Felman in an article for Foreign Affairs in December.

What are the prospects for the remaining two drivers of growth – exports and government expenditure – to provide an impetus for aggregate demand? Aggregate demand refers to the demand for finished goods and services produced in an economy, according to Investopedia.

While services exports have remained buoyant through the pandemic, merchandise exports have not. The current government inherited sustained export growth from 1992 to 2014, at roughly 18% per annum. The share of exports rose from under 10% of the GDP to 25% by 2008, and even after falling slightly in the wake of the global economic crisis of 2008, it recovered.

In 2013-’14, merchandise exports stood at $318 billion. It fell thereafter and remained below that level for five full years, before recovering for over a year, but then decreased again recently to around $400 billion before falling again. The Russia-Ukraine war and an impending recession in advanced countries bodes ill for India’s exports.

Finally, there will be limits in the forthcoming budget on the government raising public spending, including for capital expenditure (which could crowd in private investment), as public debt-to-GDP rose from 65% to 90% of the GDP during Covid-19, before falling somewhat to 85% (as the Central Statistics Office estimates). The imperative to contain the fiscal deficit at 10% of the GDP remains overwhelming.

Santosh Mehrotra is Professorial Senior Fellow, Nehru Memorial Museum and Library, New Delhi.

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