The year, 2024, concludes with slowing growth, persistent inflation, and narrowing policy choices. Underlying the economic slowdown is feeble consumption that, amongst other forces, is dragged down by food inflation. Fundamental factors like increasing inequality, particularly between corporate profits and wage growth, have also surfaced to the fore towards the year-end to form a difficult narrative. How to navigate the trade-offs and the divergences is a challenge when inflation and public debt are serious constraints — monetary easing must wait longer while budgetary decisions must weigh growth support with financial limitations.
Real GDP growth slowed to 5.4% in the September quarter as manufacturing weakened, investment disproved expectations, while private consumption and government spending both slowed down. This set off a chain of downward revisions to this year’s growth forecasts. Disappointment deepened with the central bank’s sharp, 60-basis points cut to its growth projections to 6.6% in the first week of December and a 30-basis point upward revision to forecasted inflation (4.8%). The widely anticipated interest rate cut did not materialise as a result and has now been pushed to next year.
Retail inflation is chiefly driven by tenacious price rise in one or more food items. Monetary action can do little except contain indirect spillovers. Output is dragged down by weakening demand that in part reflects the reduced buying capacity of the inflation-hit consumer. Consumption remains a sore spot, impacted by weak income levels and slow wage growth, especially in urban areas. Though real private final consumer expenditure had rebounded strongly in the June quarter after 4% growth in 2023-24, the September outturn showed a slippage.
The inflation-growth trade-off has thus become complicated. Many regard the slowdown as cyclical. It would be good if it were so. Another strand, however, is now weighing whether growth is sliding back to a lower trend with the abatement of the pandemic-related spending force. This should become clearer next year. Some developments and evidence suggest the presence of deeper underlying features that may be more structural in nature. For one, several consumption-exposed firms have attributed their falling sales to the price rise, confirming that inflation is hurting growth. Considering the fact that food price rise has been strong and persistent for more than four years in succession, the prolonged impact upon real incomes, expenditures of households, and the overall economy is possible — the private sector has no incentive to expand when people are buying visibly less than before.
Second, a CMIE analysis of a large set of manufacturing companies shows that the September 2024 quarter’s performance was one of the weakest going back to December 2009 (after the post-global financial crisis). In fact, it ranks with the pandemic-affected quarters (March and June, 2020) and the declines in 2011 and in 2012 due to the global trade collapse. It is unclear what underlies this extreme drop in manufacturing, which has strong linkages to employment and world demand — the latter has been remarkably resilient in 2024, nearly the same as 2023 (3.2% versus 3.3% growth in world output according to the International Monetary Fund).
Three, a survey by the industry body, FICCI, and Quess Corp Ltd, a tech-enabled staffing firm, is reported to have shown that annual wages across several sectors (engineering, manufacturing, process and infrastructure, and fast-moving consumer goods companies) grew between 0.8%-5.4% between 2019 and 2023, a period when consumer prices grew much faster resulting in small or negative real income growth. In fact, corporate profits grew steadily throughout to reach their highest in one-and-half decades by March 2024. This points to increasing gaps in the income shares accruing to capital vis-à-vis labour.
Four, the leading inequality expert and co-founder of the World Inequality Lab, the French economist, Thomas Piketty, who visited India this month, shared the conclusion that at this point, India is almost at the very top of the world in inequality. He noted that at present, 55%-60% of India’s total income is going to the top 10% whereas the bottom 50% get about 15%. The corresponding percentage shares are 25%-30% for Europe, 40% for China, and 40%-45% in the highly unequal United States of America, according to Piketty (Business Standard, December 14, 2024).
Together, these findings and the economic slowdown create formidable challenges. There are fundamental problems with a longstanding presence. Persistent increases in inequality with weakening wage growth and income levels are intolerable; they have socio-political consequences. At least one manifestation and a possible mitigation may be the trend of direct cash transfers to specific groups at election times. Explicit political giveaways as these are their justification on welfare grounds and are incontrovertible in light of the recounted evidence. Nonetheless, these are band-aid or short-term solutions when drastic surgery or course corrections ought to be the remedies. Unsustainable in perpetuity, these are no substitute for economic opportunities, jobs or investments.
For now, there is common demand for targeted budgetary support to advance consumption while some have asked for lower indirect taxes on mass consumption items. How much, however, can the government spend to raise private consumption? There is limited policy space given the pressure to reduce public debt and deficit. Any booster will compromise public capital spending, the mainstay of growth for many years now. Can the central bank reduce borrowing costs? Apart from the fact that the banks are still raising rates, there are competing concerns ranging from stubborn inflation, slowing foreign capital inflow, to leveraged households.
The tight spots and narrowing choices are clear as the year comes to an end. Resolving these is the task ahead. Long-term structural challenges like inequality and prolonged consumption decline will take more than short-term macroeconomic management.
Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi
