Why you should care
India’s middle class is spending less, leading to a swift deceleration of one of the world’s major fast-growing economies.
Kaushik Sengupta, 45, a product development manager for an export-oriented shoe manufacturer, is the kind of middle-class Indian whose family’s consumption should be helping to power the economy. But his decision in 2009 to buy a $33,500 apartment from an ostensibly reputable property developer, who promised it would be ready in two years, proved a financially crippling mistake. Today his unfinished flat on New Delhi’s outskirts is one of the estimated 465,000 residential units across India that were sold but never completed, as property developers confronted regulatory issues, litigation over land titles or simply ran out of money.
For the past decade, Sengupta, like many others in his situation, has paid both a mortgage and a rent, which together eat up around half of his $1,110 monthly salary. The rest goes to food, school fees and other household necessities, leaving little for discretionary purchases. “I end up with nothing in my hand to spend,” he says. “It’s a disaster.”
He is not alone in this gloom. After a surge of national optimism following Prime Minister Narendra Modi’s first election victory in 2014, many Indian families have lost confidence in their economic prospects. As they confront challenges ranging from an urban real estate crisis to a rural income squeeze and persistent lack of job opportunities for young people, India’s households are engaging in a collective belt-tightening that has undermined economic growth.
Whatever little hope they had that things will improve is gone.
Sunil Kumar Sinha, India Ratings and Research
India’s gross domestic product growth is in its fifth consecutive quarter of deceleration, figures published last week showed, tumbling to a six-year low of just 5 percent year-on-year between April and June. That was down sharply from the disappointing 5.8 percent in the first three months of 2019, and from 8 percent in the same quarter the previous year. One of the biggest drags on growth was a sharp deceleration in private consumption, which had been one of the economy’s major growth engines over the past few years. Private consumption grew just 3.1 percent year-on-year from April to June, down from 7 percent growth in the previous quarter. On a quarter-on-quarter basis, private consumption contracted 6.7 percent. The shift has been exacerbated by a withdrawal of previously easily available consumer credit from now-ailing non-bank lenders.
“Consumers in rural and urban areas have reached the point where they cannot see any income growth,” says Sunil Kumar Sinha, principal economist at India Ratings and Research. “Whatever little hope they had that things will improve is gone, and households have put a sudden break on their consumption.”
As a result, manufacturing has taken a hit. Its growth tumbled to 0.6 percent year-on-year, with the car industry suffering a severe contraction leading to hundreds of thousands of job losses. The grim data has stunned analysts, many of whom have now sharply lowered their growth forecasts for India’s economy for the current financial year to about 6 percent, and prompted a rare public rebuke from Modi’s predecessor, Manmohan Singh.
“The state of the economy today is deeply worrying,” Singh, the former prime minister, said in a video issued by the opposition Congress party once the GDP data was released. “India has the potential to grow at a much faster rate. But all around, mismanagement by the Modi government has resulted in this slowdown.”
New Delhi has downplayed the magnitude of the economic change, pinning the blame on a deteriorating international economic environment stemming from trade friction between the U.S. and China. It has emphasized that India is still growing faster than many developed economies. Economists say India’s economy is likely to show slight signs of a pickup in the second half of the financial year. But, many say, getting growth to reach its potential rate of 8 percent will require more profound structural reforms to improve the business climate and tackle serious long-term challenges including a persistent lack of job creation that constricts household budgets and undermines long-term savings rates.
Household savings — the biggest component of a nation’s overall savings rate — have fallen from 23 percent of GDP in 2012 to 17 percent this year. Household indebtedness rose from 9 percent to 11 percent of GDP in the same period. “India’s fundamental problem is that employment growth and GDP growth are not working in sync,” says Ritika Mankar, an economist at Ambit Capital. “As a result of this, the pace of savings is just not growing, and the savings-to-GDP ratio has in fact been coming under pressure.”
Mankar says lower savings led to a higher cost of capital, which then damped down investment. “There is just not enough money available at affordable rates,” she says. Meanwhile, Sengupta, straining to pay both rent and a mortgage, is pessimistic about his personal prospects. When Modi was first elected in 2014, he had hoped for a solution to help so-called stuck homebuyers like him. That hope has dissipated. “Everybody voted in 2014 thinking that whatever mess they are in will be sorted out,” he says. “But the government is not intervening or coming onto the scene. On the ground, the reality is that nothing constructive is coming out.”
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