India’s growth story may not have a happy ending

What the data suggests, is that India’s numbers are unsustainable. They’re driven by debt-fueled household consumption and government investment. Neither can form the basis of a long-term growth strategy for India.

By Mihir Sharma

Indian households are saving less than they have for half a century. According to the Reserve Bank of India, net household savings in 2022-23 — the Indian financial year runs from April to March — were only 5.1 per cent of gross domestic product. That’s down from 8 per cent of GDP in 2019-20 and 11.5% in the year the pandemic hit.

These are levels not seen since the oil crises of the 1970s. The debt burden of Indians is also increasing. Household financial liabilities rose sharply to 5.8 per cent of GDP in the last financial year. The ratio had stood at 3.8 per cent the previous year.

This is a problem. If a country does not save, it does not grow. It is increasingly hard to see where India’s growth momentum will come from.

To outside observers, this might sound like an odd concern to raise. The International Monetary Fund expects India to grow at 6.1 per cent during 2023, faster than most other large economies.

What the data suggests, however, is that India’s numbers are unsustainable. They’re driven by debt-fueled household consumption and government investment. Neither can form the basis of a long-term growth strategy for India.

In its boom years of the early 2000s, when India grew almost as fast as China, investment by companies optimistic about the country’s long-term prospects powered its expansion. That was backed up by a decent savings rate and a government that steadily decreased its primary deficit  — the fiscal deficit less interest savings. That figure was in surplus by the time the financial crisis hit.

With companies reeling after 2008, outsize government spending picked up the slack. We went from a surplus of 1.1 per cent of GDP before the crisis to a primary deficit of 2.5 per cent of GDP after and got double-digit growth as a reward.

Naturally, that couldn’t last. Through much of the 2010s, the government cut down on overall spending. An increase in the share devoted to investment, as well as a consumption boom as more Indian households began to spend on luxuries and access to formal finance increased, kept the economy ticking over for a while.

Now, however, post-pandemic inflation has shrunk real household incomes. That has intensified a pre-existing trend: Gross household savings peaked at more than 25 per cent of GDP in 2010 and have declined sharply since. Households are increasingly borrowing to finance their spending.

At the same time, private-sector investment has never fully recovered since the boom years. China’s investment rate is 40 per cent; India’s is 28 per cent to 30 per cent, well below the peak rates of 34 per cent to 36 per cent achieved in the 2000s.

This decrease is almost entirely due to a collapse in investments made by private corporations since 2008. Attempts to reverse this collapse have not succeeded: Corporate investments continued to decline in the last two quarters, according to Motilal Oswal Financial Services.

Today, the government is doing most of the work on investment; companies aren’t taking on their share of the burden. Total private-sector projects sanctioned by Indian banks and financial institutions, when the government-driven infrastructure sector is excluded, have grown by only 1.8 per cent since the current government took office in 2014.

Households, meanwhile, are running up debt just to maintain consumption levels. What little they manage to save is being co-opted by government to service its increasing deficit. And, even then, the government is running out of room to spend. It simply isn’t gathering the taxes that would justify its big public-investment programs.

If India is to maintain its world-beating growth rates, private corporate investment must recover to 2000s levels. Reversing this sustained slowdown requires two things to happen.

First, the government must stop taking the lion’s share of Indian households’ declining savings, so that more capital is available at an affordable rate to firms.

Second, it needs to reassure private companies that it is safe to invest in India. Pro-business rhetoric from officials has consistently been undermined by the politicization of tax collection and enforcement, by more complex forms of tax  compliance, and by the unthinking extension of regulation. High tariffs meant to boost domestic manufacturing have instead convinced local suppliers that they will not be able to participate in global value chains.

For a decade, India’s growth has been fueled by consumers and by bureaucrats. That model has run its course. It’s time for the government to step back and let the private sector take the lead.