The Black Hole of GDP

What Do You See? - created on OpenArt

If anyone tells you how fast the Indian economy is growing, they’re just guessing. 

Because they don’t know. No one knows.

All the official data on Indian GDP, whether from our government, or from international agencies, are only measuring one part of the Indian economy - the formal sector. Apart from agriculture, on which our statistics are pretty good, government data on the Indian economy is based on data from firms that are obliged to submit regular returns. In 2016, this sector accounted for 50% of the non-farm Indian economy. Since then, the government assumes, this percentage has not changed. So, once you have the data on the formal sector, you just need to double it, and you have a number for the whole economy - plus of course agriculture.

The 2016 percentage for the informal sector was based on a large survey, which has typically been done every five years, and should have been repeated in 2021. Because of COVID, it didn’t happen then. In October 2022, our National Statistical Office (NSO) announced that it would be conducting an Annual Survey of Unincorporated Sector Enterprises (ASUSE) later that year. Our newspapers tell us that the survey was conducted, but we don’t have the data. 

This has become all too familiar a pattern. Smart men say, when the facts change, I change my mind. Those who drive narratives say, when the facts are inconvenient, bury the facts.

The net result is, we don’t know how one half of the Indian economy is doing. Ironically, the same people who drive the narrative that the Indian economy is thriving, also say that it is getting more formalised -

 “Isn’t that super, and look how GST collections are growing!!”. 

A more formalised economy, by definition, means a lower contribution of the non-formal sector - or Unincorporated Sector Enterprises, to use the official term. Which means that we can no longer predict the size of the non-farm economy by multiplying the formal sector number by a factor of 2. The correct factor may be 1.99 or 1.55. But to repeat myself, that factor is a guess. The reality is - we don’t know.

What we do know is that the growth in Indian consumption has slowed a lot. COVID was 

bound to have that effect, but the recovery since has been both slow, and uneven. Just two days ago, the cigarettes-to-hotels giant, ITC, announced its annual results, and some pointers from its press release are very telling.

The hotels business did gangbusters - recording an annual growth of 15%, year-on-year. Its mass consumer goods business, which includes cakes, biscuits, chips and other savoury snacks, recorded “subdued consumption demand, but (ITC) mentioned that improving macroeconomic indicators, prospects of a normal monsoon, and green shoots witnessed in rural demand…”

Ah yes, the green shoots, which appear every quarter when consumer goods companies review their results, but disappear in the bazaars when their sales force go out to sell their goods. National-level data is messy, often suppressed, and highly contested, but what we do have suggests that Indian consumption does not square with the headlines of the fastest growing major economy. Personally, I have been tracking the annual sales of the top seven consumer goods companies for two decades now, and the picture is clear - growth peaked in 2015, and has not recovered since.

From 2010 to 2015 (financial years), the turnover of these companies grew at an annual rate of 14.8%. Inflation was high during this period, averaging 8.1%, so on a ‘real’ basis, consumption grew by 6.8% a year.

Between 2015 and 2020, real turnover of these companies grew by just under 1%.

In the last five years, from 2019 to 2024, consumption growth was 3%.

Other data, too, suggests that the Indian consumer is under pressure - financial savings are at an all-time low, while personal loans are at an all-time high. Like companies, consumers hope the green shoots will blossom, and are willing to borrow against that day when their incomes improve. But if that doesn’t happen - and the employment scenario doesn’t suggest it will - we could be in for a long period of slow growth. 

The slowdown in the Indian economy was well recognised by the NDA government in its first term. How much was due to the balance sheet stresses of the global financial crisis of 2008, the self-goal of demonetisation in 2016, or the messy implementation of GST is moot, but in 2019, early in its second term, the government decided to address the slowdown by a massive cut in corporate taxes. The hope was, corporate balance sheets would be repaired, and business leaders would go out and invest.

The first happened; the second didn’t. Businesses invest when they see demand, but as we now know, the household balance sheet was stretched as well - except for those who gained from the enhanced profits of large businesses, and those who owned, or bought, shares in them. Equity markets soared, premium real estate boomed, but the bazaars of the vast hinterland remained sluggish.

The government has tried to fill the hole in private sector investment by putting public money into building out infrastructure, generating jobs, keeping cement factories and steel mills running. But this road runs out - you get spanking new highways that are under-used, airports with only a few flights a day, convention centers without conventions - all while the government tries to balance its books, and reduce its fiscal deficit.

If India wants to get back to a decent rate of growth, one that generates jobs and incomes outside of the top 1%, we need to stimulate demand. This means another round of tax cuts,  this time for the consumer - both income tax, and GST. If we can also rationalise the slabs and compliance around GST -  which was supposed to be the Good and Simple Tax, but is anything but - that might also make life easier for the small entrepreneur, the Unincorporated Enterprise, whose current status we don’t know. 

Tax relief would put stress on the exchequer, delay the path to fiscal discipline, but I really don’t see an option. It’s too much to hope that the government - any government - bites the bullet on disinvestment, which has always underperformed annual budgets. The notion that government-owned companies are family silver, which it is dishonourable to sell, is so outdated. We keep hearing that business is not the business of government, yet selling its stakes in business is a bogey no government is willing to tackle head-on. The top ten PSUs alone have a market value of some 24 lakh crore rupees. A 10% reduction in government shareholding in these companies would yield 2.4 lakh crores, twice the annual budget on the employment guarantee scheme, MNREGA, which benefits over one hundred million households a year.

Paying India’s poorest households a pittance to “dig holes, and fill them up”, is only partly a caricature of MNREGA, which has broadly failed to generate meaningful assets. These households need to become part of the productive cycle of meaningful work and market consumption. This requires broad-based triggers for economic activity, which requires a lot more work than cheering the soaring Sensex.

The road-map to economic momentum cannot be charted without credible numbers that tell us how the economy is doing - the pakora wallahs and the fruit vendors, the saree weavers and the blacksmiths, the shepherds and the fishermen. Not just the Ambanis and Adanis, who hog the business headlines, and more recently, the political discourse.

1. ASUSE announcement: https://pib.gov.in/PressReleasePage.aspx?PRID=1866781

2. ASUSE data not released:

https://www.business-standard.com/india-news/annual-survey-on-informal-sector-to-begin-despite-delays-in-prior-reports-123110900582_1.html