Over the past six months, a significant debate has emerged regarding the weakening of urban private consumption. Corporate leaders have reported declining sales in key sectors like FMCG and automobiles, echoing broader concerns about demand stagnation that economists have highlighted since the 2016 demonetization. Recent Economic Surveys have acknowledged the slowdown, noting the persistent challenge of inadequate private investment despite government stimulus and tax incentives, as well as the corporate sector’s failure to generate sufficient employment. Notably, there’s no clear indication of a rebound in consumer demand.

Further exacerbating these issues is the recent decline in the stock market, impacting retail investors and potentially reducing their spending capacity. The Nifty FMCG index’s downward trend since October 2024 reinforces concerns about the financial health of these companies. Coupled with foreign investor withdrawals, these factors paint a concerning picture.

Labour market data from the Periodic Labour Force Surveys (PLFS) reveals sluggish real earnings growth, especially for the self-employed. Data from ASUSE confirms minimal real growth in output per unincorporated enterprise, despite increases in enterprise and employee numbers. Compounding these worries, the PLFS indicates a rising share of agricultural employment, signalling a potential reversal of structural economic progress.

While agriculture shows promising growth in revised GDP estimates (4.6% projected for FY25), this is largely attributed to a favourable Kharif crop and relies heavily on a successful Rabi season, vulnerable to climatic fluctuations. Sustained agricultural growth requires substantial structural reforms and increased public investment to achieve meaningful improvements in farmers’ incomes.

Conversely, the manufacturing sector, crucial for employment and output, is projected to underperform significantly (5.6% in FY25). This suggests that initiatives like the PLI are not yielding anticipated results, casting doubt on the outlook for employment and manufactured exports. Global economic uncertainties, particularly those stemming from recent policy shifts, further compound these challenges.

Beyond demand-side issues, the concentration of economic gains at the top, coupled with stagnant real incomes for the majority, is a critical concern. Demand-side measures aimed at boosting purchasing power among lower-income groups, such as increased funding for programs like MGNREGS, remain underutilized. Similarly, public investments in agriculture and labour-intensive rural infrastructure are neglected. In the MSME sector, long-overdue reforms to enhance profitability are not being implemented.

Current policy responses primarily focus on supply-side measures: easing credit, reducing corporate taxes, improving the “ease of doing business,” and relying on monetary policy. While increased capital expenditure and some income tax relief have been provided, along with recent repo rate reductions, these measures are insufficient to address the fundamental issues.

A more critical perspective centres on the expansion of people’s capabilities and freedoms. This requires examining the creation of quality jobs, improvements in human development outcomes, income and wealth distribution across various demographics, and the environmental impact of economic activities. Shifting focus from mere GDP growth rates to the nature and distribution of growth will lead to more effective and equitable policies.

India faces a persistent fiscal crisis, marked by the government’s inability to meet its tax revenue targets, leading to a downscaling of its fiscal ambitions. This shortfall has become so acute that the Reserve Bank of India’s dividends now constitute a substantial portion of government revenue.

Concurrently, the RBI’s credibility has eroded, evidenced by its frequent inflation target misses and a diminished level of autonomy compared to the previous decade. Rhetorical pronouncements, while politically appealing, fail to substitute for rigorous central bank analysis. The Monetary Policy Committee (MPC) meetings have devolved into predictable, analytically shallow events, offering little substance beyond superficial media coverage.

India’s economic landscape is marked by several concerning trends. A primary issue is the wage squeeze, disproportionately affecting the vast informal workforce. Even formal sector employees have seen their real wages decline in recent years, despite nominal wage increases. A FICCI-Quess Corp report indicates that nominal wage growth (0.8–5.4%) was outpaced by retail inflation (4.8–5.7%), leading to stagnant or reduced real earnings. Furthermore, the actual cost of living, particularly food inflation, often surpassed official retail inflation figures. This contrasts sharply with a fourfold increase in corporate profits, contributing to sluggish demand due to a rising profit-share and a shrinking wage-share.

The Periodic Labour Force Survey corroborates these findings. In 2023–24, only one-fifth of India’s workforce held regular formal sector jobs. Within this group, a significant portion lacked written contracts (58%) or social security benefits (53%). The informal sector, comprising nearly 80% of the workforce, faces income uncertainty. The government aims to formalize this sector through initiatives like the Production Linked Incentive (PLI) scheme, designed to boost manufacturing. However, the PLI scheme has faced implementation challenges, requiring adjustments. The scale of the employment problem may necessitate broader policy interventions.

In 2024, balance of payments concerns emerged. Along with other factors, it resulted in net negative inflows for the year. This trend could further weaken the Indian rupee, which has experienced a notable depreciation in last couple of years. (IPA Service)