There has been much discussion in recent months on the sharp slowdown of growth in the Indian economy. India’s gross domestic product (GDP) growth is lagging optimistic projections and the estimate has been revised downwards by various agencies. Inflation remains high, which indicates the continued presence of supply bottlenecks, especially in food items. While most analyses and commentaries focus on changes in such economic variables in the short term, what they miss is that the present economic slowdown in India has a longer history of over a decade, and its sources must be located in the severe long-term crunch of consumption demand in the economy.
There is no doubt that India is a large market, but its size is drawn from its larger absolute population and not from a higher per capita income. Over the past seven decades after independence, the failure to create a large home market was a historic failure of the Indian state as compared to neighbours like China or eastern counterparts like South Korea. While this has remained a stylised fact, what has been more worrisome is the sharp deterioration in a range of macroeconomic indicators after 2011-12. In my view, the present economic slowdown is the continuation of this longer crisis, punctuated only by the arithmetic revival of growth rates after the Covid-19 slump.
To begin with, investment rates in India rose from 35.2% of GDP in 2004-05 to the historic peak of 40% in 2010-11. However, they began to fall continuously afterwards to 32% in 2016-17, 30.4% in 2019-20, and 31.4% in 2023-24. If I assume, for simplicity, that the investment rates were maintained at a lower average rate of 36% after 2010-11, the gross capital formation cumulatively foregone between 2011-12 and 2023-24 would be about Rs 50 lakh crore. The decline in investment rates was spread across households, public corporations, and private corporations.
The fall of investment rates tells you the extent to which the Indian economy could have invested and grown over the last 13 years but did not. The decline was not just a cyclical phenomenon but a structural phenomenon, which was reflected in weak private sector confidence, subdued corporate profitability, sluggish credit growth, and increasing financial sector vulnerabilities.
The period after 2011-12 was also one where the overall savings rate slumped. From 36.2% in 2010-11, India’s savings rate fell to 30.5% in 2015-16, 29.1% in 2019-20, and 30.7% in 2023-24. This fall took place across households and public corporations. Among households, the fall in savings was associated with a rise in the burden of liabilities, and a consequent upward stress on interest rates.
The long period after 2011-12 also witnessed at least three major economic shocks: the demonetisation of 2016, the ill-planned GST reform of 2017, and the Covid-19 pandemic of 2020 and 2021. Together, these shocks led to a large-scale destruction of markets, disruption of supply chains, shutdown of enterprises, and a fall in employment and wages. The impact was felt disproportionately by informal and unorganised segments in manufacturing and services sectors. The spaces and markets vacated by these informal and unorganised sectors were usurped by formal and corporate sectors. While this phenomenon would appear as increasing formalisation of the economy in form, it was reflective of a perverse phenomenon of increasing concentration of market power and profits in essence.
The decline and stagnation of consumption demand in India today must be seen in this long-term context. Three sets of data on the economy would amplify the extent of the crisis and its impact on consumption demand.
First, the crisis of employment in India has significantly worsened after 2011-12, and particularly after 2017-18. On its part, the government claims that there was a rise in female workforce participation rates. But this arose from an increase in unpaid forms of selfemployment among rural women in agriculture. In no way could this be argued as to be reflective of an expansion of meaningful and productive employment.
Secondly, real wages in rural areas were rising till 2016-17. But this reversed afterwards, leading to a stagnation of real wages till 2021 and a fall after 2021 in a range of rural and semi-urban occupations.
Thirdly, capacity utilisation in the manufacturing sector is an explicit indicator of the trends in aggregate demand in the economy. The capacity utilisation in manufacturing was close to 82-83% in 2010 and 2011, but there has been a fall since then. Today, our capacity utilisation struggles to get past the 75% mark, hovering around 73-74%.
The demographic dividend that India possesses requires a high investment rate to generate sufficient productive employment opportunities for its young population. The current trend threatens to underutilise this potential and risks the growth of social and economic instability. A declining investment rate also impacts long-term productivity and competitiveness. Infrastructure gaps, poor logistics, and inadequate industrial capacity could acutely limit India’s ability to become a global manufacturing hub, a goal the government aspires to through its "Make in India" and "Atmanirbhar Bharat" campaigns.
The author is R Ramakumar, Professor, Tata Institute of Social Sciences, Mumbai. Views are personal.
