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Informist, Monday, Mar. 10, 2025

 

By Siddharth Upasani

 

NEW DELHI - Recent data by the statistics ministry showed India's GDP growth rose to 6.2% in Oct-Dec from 5.6% the previous quarter, but it also displayed signs of trouble that was already brewing since 2023-24 (Apr-Mar). Even as the GDP growth rate for FY24 was revised sharply higher to 9.2% from 8.2%, the latest national accounts data for the last financial year pointed towards weaknesses on several fronts. 

 

First, while India's gross savings in current prices was unchanged at 30.7% of GDP in FY24, the underlying numbers suggest a continued apathy towards savings. Households' savings, which account for a majority of total savings in the economy, declined to a seven-year low of 18.1% of GDP from 18.6% in FY23, driven by fewer physical assets, which comprise mainly real estate and gold and silver ornaments.

 

In FY24, households' savings in physical assets were down at 13.0% of GDP from 13.7% the previous year. "The decline is surprising given the strong growth in mortgage credit growth and anecdotal data indicating pick-up in real estate activity," Gaura Sen Gupta, IDFC FIRST Bank's chief economist, said.

 

To be sure, while physical savings fell, gross financial savings rose. But so did liabilities. As a result, net financial savings of households edged up to 5.2% of GDP in FY24 from 5.0% the previous year, which was the lowest in nearly five decades. What is worth noting is that the number for FY24 is down 10 basis points from the previous estimate of 5.3%. In gross terms, households' financial liabilities increased to a 17-year high of 6.2% of GDP in FY24.

 

CONSUMPTION ANGLE

Worryingly for policymakers, the fall in households' gross savings in FY24 has been followed by weaker economic growth in FY25. After jumping to 22.7% of GDP in pandemic-hit FY21, households' savings rate rapidly fell to 20.1% in FY22 and 18.6% in FY23. According to IDFC FIRST Bank's Sen Gupta, the decline for a third straight year in FY24 suggests that the "strong pick-up in urban demand post COVID-19 was driven by pent-up demand which is now over". This is reflected in the share of private final consumption expenditure in nominal GDP, which declined to 60.2% in FY24, down 130 basis points from FY23. According to economists, this is due to weaker income growth.

 

It is worth noting that the statistics ministry's second advance estimate for FY25 sees the share of private final consumption expenditure rising to 61.5% of GDP. However, this needs to be taken with a pinch of salt given that the second advance estimate is unrealistically upbeat. Case in point: it implies a real GDP growth rate of 7.6% in the final quarter of the financial year--a figure economists expect to be missed by 50-100 bps.

 

"Household savings are dependent on real income/wage growth, which has been stagnant for majority of the population (as indicated by the wages data from the Periodic Labour Force Survey) due to lower job prospects and high persistent inflation," Paras Jasrai, senior analyst and economist, India Ratings & Research, said in a note on Wednesday.

 

INVESTMENT STRUGGLES

The revised national accounts data also offers little to support the continued talk of green shoots being visible when it comes to private investment. According to the data, gross capital formation by the private sector--a proxy for investments--fell to a three-year low of 11.2% last year. And Jasrai of India Ratings & Research sees the figure falling below 11% in FY25.

 

Even the share of private sector investment in gross capital formation fell to 36.9% in FY24 from 39.5% in FY23. Delve deeper and signs of weakness in private investment become clearer.

 

Take, for example, the private non-financial sector's investment in ‘dwellings, other buildings and structures', which was down 10.0% year-on-year in FY24, with its share in gross capital formation at a three-year low of 10.5%, suggesting reduced activity in terms of building of new factories. This is in line with what the Reserve Bank of India's surveys tell us, with manufacturing sector capacity utilisation averaging under the key level of 75% for the fifth straight year in FY24.

 

Companies usually invest in expanding production after capacity utilisation exceeds 75% on a sustained basis.

 

"The weak demand conditions seem to have been pulling down the confidence of the private sector to step up capex in a big way. This is worrisome as given the favourable demographic dividend, India needs to generate jobs at a pace which is at least matching the pace of growth of the economy. This would only be possible in the private sector, given the limited employability space in the public sector," Jasrai said.

 

Considering GDP growth is seen falling sharply in FY25 to 6.5% as per the second advance estimate from 9.2% in FY24, it is unlikely the private investment cycle has turned this year. Of course, the recent numbers will undergo further revision. And unless they are revised dramatically, the problems plaguing the Indian economy will remain.  End

 

Edited by Vandana Hingorani

 

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