The Indian economy is growing fast, but problems loom

In 2022, India will have to deal with ongoing inflation of fuel, food prices as well as rising urban unemployment.

A vendor waits for customers at a vegetable market in Rabangla town
India has been hit by double-digit inflation for the past several months [File: Rupak De Chowdhuri/Reuters]

Baldev Kumar threw his head back and laughed at the mention of India’s resurgent GDP growth. The country’s economy clocked an 8.4-percent uptick between July and September compared with the same period last year. India’s Home Minister Amit Shah has boasted that the country might emerge as the world’s fastest-growing economy in 2022.

Kumar could not care less.

As far as he was concerned, the crumpled receipt in his hand told a different story: The tomatoes, onions and okra he had just bought cost nearly twice as much as they did in early November. The 47-year-old mechanic had lost his job at the start of the pandemic. The auto parts store he then joined shut shop earlier this year. Now working at a car showroom in the Bengaluru neighbourhood of Domlur, he is worried he might soon be laid off as auto sales remain low across India.

He has put plans for his daughter’s wedding on hold, unsure whether he can foot the bill. He used to take a bus to work. Now he walks the five-kilometre (three-mile) distance to save a few rupees. “I don’t know which India that’s in,” he said, referring to the GDP figures. “The India I live in is struggling.”

Kumar wasn’t exaggerating – even if Shah’s prognosis turns out to be correct.

Asia’s third-largest economy is indeed growing again, and faster than most major nations. Its stock market indices, such as the Sensex and Nifty, are at levels that are significantly higher than at the start of 2021 – despite a stumble in recent weeks. But many economists are warning that these indicators, while welcome, mask a worrying challenge – some describe it as a crisis – that India confronts as it enters 2022.

November saw inflation rise by 14.23 percent, building on a pattern of double-digit increases that have hit India for several months now. Fuel and energy prices rose nearly 40 percent last month. Urban unemployment – most of the better-paying jobs are in cities – has been moving up since September and is now above 9 percent, according to the Centre for Monitoring Indian Economy, an independent think-tank. “Inflation hits the poor the most,” said Jayati Ghosh, a leading development economist at New Delhi’s Jawaharlal Nehru University.

All of this is impacting demand: Government data shows that private consumption between April and September of 2021 was 7.7 percent lower than in 2019-2020. The economic recovery from the pandemic has so far been driven by demand from well-to-do sections of Indian society, said Sabyasachi Kar, who holds the RBI Chair at the Institute of Economic Growth. “The real challenge will start in 2022,” he told Al Jazeera. “We’ll need demand from poorer sections of society to also pick up in order to sustain growth.”

Small and medium enterprises devastated

That will not be easy, say experts. The pandemic has devastated India’s micro, small and medium enterprises (MSMEs), which contribute 30 percent of the nation’s GDP as well as half of the country’s exports and represent 95 percent of its manufacturing units.

The government of Prime Minister Narendra Modi told Parliament in December that a survey it had conducted suggested that 9 percent of all MSMEs had shut down because of COVID-19. And that might be just the tip of the iceberg. In May, another survey of more than 6,000 MSMEs and startups found that 59 percent were planning to shut shop, scale down or sell before the end of 2021.

Workers make parts for household mixers at a workshop in Mumbai, India
India’s micro, small and medium enterprises contribute 30 percent of its GDP [File: Danish Siddiqui/Reuters]

“The decimation of MSMEs is why we’re seeing core inflation, and we should be very worried,” said economist Pronab Sen, former chief statistician of India, referring to an inflation measure that leaves out food and energy because of their volatile price shifts. India’s core inflation stood at more than 6 percent in October. The level of competition in the market has also dramatically shrunk, he said. “Pricing power has shifted to a small number of large companies,” Sen told Al Jazeera. “And it is their exercise of this power that is leading to core inflation.”

When fuel prices rise globally – and subsequently in India – some inflation is unavoidable. But a competitive market usually forces companies to absorb much of that burden in their margins. Without that competition, Sen said, it is easier for firms to pass more of the increased costs on to consumers.

MSMEs have long been the backbone of the Indian labour market, employing 110 million people. Their struggles are a key reason for India’s failure to reduce unemployment rates, Sen added.

Ashoka Bakery in New Delhi’s Mukherjee Nagar catered predominantly to students and hostelers at the nearby University of Delhi. But with no physical classes since March 2020 and therefore no customers, the hole-in-a-wall eatery shut down in May this year. “I waited for more than a year, starting, stopping and starting again,” Prabhu Charan, the owner, told Al Jazeera. “Eventually I gave up.”  Eight employees lost jobs.

All this bodes ill for India’s efforts to revive demand. “Because the incomes of those who were primarily dependent on MSMEs for employment have taken this hit, consumption levels are low,” Sen said.

Urban unemployment

The scarcity of urban employment has pushed more and more Indians towards the country’s rural job guarantee scheme, under which beneficiaries get at least 100 days of paid work. Such is the demand under the scheme that its annual budget was exhausted in October, just seven months into India’s financial year.

“We desperately need to expand the rural job guarantee programme, which has been starved of funds,” Ghosh told Al Jazeera.

A woman labourer works at a road construction site outside Hyderabad city in India
India’s rural job guarantee scheme was exhausted by October [File: Krishnendu Halder/Reuters]

To be sure, some of India’s current challenges are not entirely new. The country has never successfully built a manufacturing-led economy, necessary to create adequate jobs, said Kar. Successive governments have struggled to bring about meaningful factor market reforms – in land and labour laws for instance – he added.

For all its devastation, the pandemic forced the increased digitalization of the economy, something Kar described as a positive. The negative global sentiment towards China, in part because of the COVID-19 crisis, could also create an opening for India to draw investments, he said.

But none of that is likely to be possible without major reforms. In a deeply unequal country like India, it would be important to build a political consensus on reforms, and marry them with a strong social security programme, Kar said, adding that a clean-up of the financial sector would enable easier – though responsibly disbursed – loans. “If we miss this opportunity, it would be disappointing,” he said.

To Sen, what is most important at the moment is for the government to urgently support MSMEs. When the federal government announced a nationwide lockdown in March 2020, it introduced a temporary moratorium on the repayment of loans by MSMEs. “That was a very good step,” the former chief statistician said. But there was no help for MSMEs hurt by the second wave of COVID in April and May this year.

Even with the recovery in growth, bakery owner Charan said he is not confident about renting space for another business just yet: He fears another surge in cases is around the corner with the Omicron variant of the virus.

Fixing this crisis will take sustained efforts on the part of the government, the former chief statistician said. “Sadly, at the moment, I don’t see signs of that,” Sen said. “There’s far too much hubris about the state of the economy.”

Source: Al Jazeera