Indian Economy is nosediving slowly since 2014

 

I am sorry to say that the Indian economy is not only falling but falling very steadily. And unfortunately, there has been no action to arrest the phenomena, rather there is no realization on the government’s part. Possibly some people will jump up to counter me that the Indian economy is growing, the GDP growth rate is still around 5.5%, etc. However, I have already written many times that I do not consider the GDP figures. I believe them to be manipulated and highly inflated. Secondly, the GDP growth figure in isolation need not reflect an improvement in common well-being. I would rather go into the depth of structural economics that exposes the actual status of the economy. For example, we may consider the following two parameters -

Net financial savingsIn 2011, the net domestic household financial savings were 10% of GDP, but fell to 5.4% in 2023, a five-decade low.

Financial liabilitiesThe growth rate of financial liabilities has exceeded that of gross financial assets, with financial liabilities growing at 16.1% year-on-year and gross financial assets averaging 10.8% year-on-year.

Here I would seek the attention of the viewers to understand the nuance of the above parameters and the assigned statistics because this is very critical. What is alarming is that our financial liabilities are increasing at a much faster rate of 16.1% than the asset valuation appreciation. This means our debts are not covered by asset value. This typically leads to bankruptcy and bank NPA. Only 67% of our debt is covered by financial assets. Net household savings in India declined sharply by Rs 9 lakh crore to Rs 14.16 lakh crore in just three years to 2022-23 (FY23) from Rs 23.29 lakh crore in 2020-21. (This is as per the National Account Statistics 2024 data released by the Ministry of Statistics and Programme Implementation(MoSPI). Notably, in FY2022-23, there was a significant surge in financial liabilities, rising by 76% year-on-year, leading to a considerable decline in net financial assets. (Union Budget 2024: 48% households report decline in earnings & savings, hope FM to offer tax relief)

Quite often people argue that the household savings getting deployed into equity markets. This argument, unfortunately, doesn’t hold good because somebody’s purchase will reflect in somebody’s sales account. The money will reflect as a return to the banking system as corporate deposits. However, the data shows that household ownership of bank deposits reduced to 61.1% in FY24 from 64.1% in FY21. This proves that household investment in the equity market has actually reduced the value of the financial asset held in equity investment. (Here's the impact of changing household savings dynamics in India - CNBC TV18)

When we speak of financial assets, it includes everything including Mutual Funds and share market investments. I have already shown that the equity investment is not helping the household investors to appreciate the value of the financial assets. As such the liabilities are increasing at a much faster rate than the rate of increase of financial assets value. We are increasingly in a debt trap and a debt-ridden economy. We will further deep-dive to understand how this is impacting consumer demand, spending behaviour, and distribution of wealth & Income.

India's consumer demand has changed in the last five years, with some areas seeing growth while others have slowed:

• Services: Spending on services like healthcare and education has increased while spending on essentials like food, clothing, and housing has decreased. This typically signifies the compulsion to spend on healthcare and education leaving lesser funds for traditional & day to day spending needs for food, clothing, and housing. This has resulted in a drop in demand for consumer goods and the consumer goods manufacturing industries have been affected.
• Premium goods, Luxury furniture Electronics, and Residential air conditioners: The premium segment of the market has seen strong growth, with sales of luxury cars and iPhones, and air conditioners, large-screen TVs increasing. Sales of residential air conditioners have reached a record high. Again this signifies the increasing inequality in wealth and income distribution. On one side 80 crore population has to be provided with free ration on the other side we are seeing strong growth in luxury car and iPhone sales. The rich are becoming richer and the poor are becoming poorer and are forced to cut down expenditures on food, clothing, and housing
• Credit card delinquencies: Credit card delinquencies have increased, which may be partially linked to slowing urban demand.
• Inflation: Inflation has been a factor in the slowdown in consumer demand. As I pointed out the financial liabilities growing at a neck-breaking speed of 16.1% year-on-year. There is no way to offset such a high percentage of liability growth. The financial assets at best offer an appreciation of only 10.8%. The average pay hikes are mostly consumed by inflation.

The rapidly increasing liabilities are quickly eating up the consumer purchasing power and cutting down financial savings. Plus the raised and extended tax net is systematically squeezing out the purchasing power. Even though people are trying to pull up spending through debt financing ( loan, EMI, deferred payment, etc). however, pulling it beyond a point will not be possible. And consumer spending will go down substantially.

Source: Statista 2024 - The Statistics Portal

Household financial liabilities in India have increased significantly since 2011, with the ratio of liabilities to assets reaching 52% in 2022-23. It was 29% in 2014–15. The increase in liabilities is primarily driven by housing loans and unsecured loans, including credit card debt. The growth of unsecured loans is due to the increased penetration of consumer credit by new fintech players and Non-Banking Financial Companies (NBFCs). In the financial year 2024, India's household debt reached around 671 billion U.S. dollars. India's household debt levels are reported to have reached a record high of 40 percent of Gross Domestic Product (GDP) by December 2023 (Q3FY24). In 2013, India's household debt to GDP ratio was 20.34%. If we talk about the public debt that is the debt of the union government - it was around ₹ 50 lakh crores in March 2014. As of March 2024, the outstanding debt of the Central government stood at ₹173 lakh crore

The rapidly increasing household debt burden is going to cut down the consumer demand to further lower as interest payment is going to eat up the lion's share of the household earnings. Plus the ever-increasing tax rates are going to eat up a large pie of the household earnings. As such 40–45% of the revenue receipt of the GOI is being spent on interest payments forcing the government to resort to large-scale deficit finance and increasing tax rates. Now tell me whether you see economic progress or debt progress. We have exponentially grown in debt. The employment level is going down and unemployment is growing. 38% of IIT graduates left unemployed. Usually, an overwhelming debt level proceeds the fall of an organization. An economic meltdown starts with falling consumer purchasing power and resulting fall in consumer demand. You can not sustain high consumer demand by going overboard on debt. The so-called claimed high GDP growth has miserably failed to enhance purchasing power. The enhancement we see is debt-ridden.