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Could the single engine driving India crash? Yes, if you go by one of Modi's top guys

ET Online|
Updated: May 09, 2019, 02.57 PM IST
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Running on empty? The single engine driving India could be on the edge of crashing
Roy said that the 10 crore Indian consumers who have so far been powering the India's growth story are now beginning to plateau out.

Highlights

  • In view of the coming crisis, India could soon get ensnared in the middle-income trap.
  • Many sectors like auto, FMCG and air travel, among others, are already wallowing in multi-quarter lows.
  • Decreasing money supply, rising uncertainty, and a plunge in income growth are forcing Indians to cut down on spending.
  • Roy said that the 10 crore Indian consumers who have so far been powering India's growth story are beginning to plateau out.
At a time when the shadow of a slowdown lengthens but the government steadfastly downplays any such concern, here comes a cracker of an observation from one of India's most celebrated economists who also happens to be a vital cog in Modi's policy team.

In an interview to NDTV, Rathin Roy, member of the Prime Minister's Economic Advisory Council (PMEAC) and Director of National Institute of Public Finance & Policy, said that India could be headed towards a structural crisis.

In view of the coming crisis, India could soon get ensnared in the middle-income trap, eventually becoming like Brazil or South Africa, the top economist warned.

"In the history of the world, countries have avoided the middle income trap, but no country — once caught in it — has ever been able to get out," he said.

The shadow of a slowdown
An ET Intelligence Group survey had found a few days ago that India's consumption story was seriously misfiring — with many sectors like auto, FMCG and air travel, among others, wallowing in multi-quarter lows.

Decreasing money supply, rising uncertainty, and a plunge in income growth in both rural and urban India were forcing people to cut down on spending, the study had discovered.

These findings were particularly worrying for the economy because consumption was till now just about the only real driver that had kept India moving. Both macro data (like household savings) and micro data (like sector and company volume) showed Indian households may have cut consumption due to slow income growth, analysts said.

Whoever comes to power on May 23 will have to step on the gas if consumption — which due to lack of private investment and export growth has assumed primary significance for the economy — were to be brought back on track to help India avoid that trap, according to experts.

The trap in India's path
The World Bank's lower middle income range for countries is defined as per capita gross national income (GNI) of between $996 and $3,895. As per 2017 figures, the income of an average Indian was in the vicinity of $1,795, which placed the country well below the halfway mark, data from Bloomberg shows.

During the same period, the comparable figure for China stood at $8,690, which put it well above the halfway mark in the upper middle income range — defined as GNI per capita between $3,896 and $12,055.

Roy said that the 10 crore Indian consumers who have so far been powering India's growth story are now beginning to plateau out. He called it an early warning: since 1991 the economy has been driven not by exports but by what these 10 crore consumers wanted to buy.

The risk, Roy said, now runs deeper; the possibility that India will remain stuck at the middle income range has now started appearing more and more real, which indicates India will never be another China or South Korea but could begin replicating basket cases like South Africa or Brazil where large swathes of poor population are powering not growth, but crime.

middle income trap
Graphic: Bloomberg


A word of caution
The widely respected policy czar's words have underlined the fate of an economy caught between a rock and a hard place at a time when a slowdown has gradually taken firm hold, analysts have opined.

And it's not just Rathin Roy. Even the Ministry of Finance, in its Monthly Economic Report of March 2019, had shed ample light on the current scenario. "India's economy appears to have slowed down slightly in 2018-19. The proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment, and muted exports," it had warned.

And what does Roy think of the claim about India being the world's fastest-growing economy? India certainly is currently the world's fastest-growing, but this is not the fastest growth in India's history, he says, adding an interesting aspect to the debate — he thinks India is fastest only because China is not currently the fastest.

A growth rate of 6.1-6.6 per cent is not bad, but consumption slowdown is going to put that under threat, Roy warned: "A time will come when that will stop."
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