All the noise is on the political front.

And in that noise, the bad news on the economic front is not getting enough attention, at least not beyond the people who tend to follow such things. 

The First Advance Estimates for 2019-20 were released a few days ago. The gross domestic product, or GDP, growth, a measure of economic growth, for 2019-20, is expected to be 4.98% (in real terms, adjusted for inflation) and 7.53% (in nominal terms, not adjusted for inflation).

GDP growth of 4.98% will be the lowest in any year since 2008-09, when the Indian economy had grown by 3.09%. It is worth remembering that 2008-09 was when Lehman Brothers, then the fourth largest investment bank on Wall Street, went bust, starting the global financial crisis. Currently, the world is not anywhere close to that. 

In nominal terms, economic growth of 7.53% will be the lowest in any year since 2005-06. In fact, growth data for the current GDP series goes only as far back as 2005-06. Also, this will be the first time in nearly a decade and a half that nominal growth will be in single digits.

This tells us very clearly that economic activity in the country has collapsed during this financial year. The question is why nominal economic growth has fallen to single digits. Take a look at Figure 1, which plots the per capita income growth (in nominal terms) or the growth in the average income of an Indian.

Figure 1 

Source: Author calculations based on RBI data 

As can be seen, income growth in 2019-20 is expected to be 6.81%. This is the lowest in any year since 2005-06. The reason for this lies primarily in stagnating investment in the economy. Take a look at Figure 2, which basically plots the investment to GDP ratio (in nominal terms).

Figure 2 

Source: Author calculations based on RBI data 

As can be seen from Figure 2, the investment to GDP ratio in 2019-20 is expected to be 28.09%, the lowest in any year since 2004-05, which is as far back as the current GDP series goes. 

This slowdown in investments in the economy has created a problem on the jobs front, leading to a slowdown in income growth (as can be seen from Figure 1). The slowdown in income growth has impacted private consumption growth as well. A slowdown in income growth, over the years, has led to a situation where the confidence that people have in their economic future has gone down. In this situation, they are not spending money the way they did in the past.

Also, it is worth pointing out that over the last few years, people have financed a portion of their consumption by borrowing more or by simply spending a greater proportion of their income. This is something that couldn’t have continued indefinitely and is unwinding now. 

Now, take a look at Figure 3, which basically plots the growth in per capita private consumption expenditure. 

Figure 3 

Source: Author calculations based on RBI data 

As can be seen from Figure 3, the growth in private consumption expenditure in 2019-20 is expected to be 8.28%, the lowest in any year since 2005-06. Private consumption forms nearly three-fifths of India’s economy and drives the bulk of the economic growth. But consumption ultimately is a function of investment.

Investment creates new jobs. New jobs ensure that more and more of India’s demographic dividend, a million youth entering the workforce every month, find work and earn an income. When this income is spent, it spurs consumption. This consumption helps others earn an income. Then they spend their earnings and so this cycle works.

This year, this cycle is not working as well as it did in the past, and has pulled down economic growth. To get the cycle going again, over the longer term, investment in the Indian economy needs to grow and the investment to GDP ratio needs to touch around 35%. But the trouble is that corporates will invest only when they see robust consumption growth. In the shorter term, private consumption needs to be encouraged. The only way to do this is to put more money in the hands of people. 

Of course, for that to happen, the politicians need to first take an interest in the Indian economy. But the economy is dull and boring and right now the JNU issue is clearly more interesting and is getting all the eyeballs. And the politicians will go where the eyeballs are. The media will follow.

Meanwhile, the Indian economy will continue to suffer because of this indifference.