By Sourajit Aiyer
This article was originally published in South Asia Monitor, India.
Some analysts in developed markets insist that future growth will come from emerging markets, whose share of world GDP has increased rapidly over the past decades. But if the India’s consumers are anything to go by, the road ahead for growth is not that straight, and it is quite bumpy.
In India, politicians, film stars, business tycoons, cricketers and the common man all have one thing in common: their shrinking wallet. The average Indian has grown poorer between fiscal year 2008 and FY2014 (the fiscal year from April 2013 to March 2014). The actual impact on specific segments of society may differ depending on the skew of income levels and impact of inflation categories. However, on average, the experience has been largely negative for the Indian wallet in this period.
Let’s take a look at the difference between the year-on-year change in India’s per capita Net National Product (PC NNP) at current prices and the year-on-year change in the Consumer Price Inflation index (CPI). Both metrics reflect an average scenario for India, since both look at the economy as a whole and are not based on individual segments. PC NNP reflects the per capita income of an Indian, i.e. how much an average Indian earns and how this has grown each year. CPI reflects the price of a typical basket of goods an Indian consumer buys, and how its price has risen each year.
This difference is nothing but the growth in real income, i.e. growth in Indians’ income after accounting for the rising prices. The difference moved northwards from 2004 to 2008, the period that coincided with the initial years of the UPA government; this indicates that the average Indian was growing richer till 2008.
But from 2008, the trend reversed. This was the year of the financial crash and recession globally, combined with several scams in India. The trend reached minimal levels by fiscal year 2013, offering a clue as to why many Indian voters were disgruntled with the previous government during the election campaigning in early-2014.
The objective of this article is not to connect the period from 2008 to 2014 with any specific political party per se. The motive is only to understand how the period fared for the average Indian wallet. Indians actually seem to have grown poorer, on an average, in terms of the growth in their real incomes between the years 2009 to 2014.
One could argue that Wholesale Price Inflation index (WPI) should have been taken as a measure of price rises instead of CPI. But CPI is a more relevant metric since it considers the basket that a “typical consumer” is buying, and in any case, calculating the differential on the basis of WPI would also show a similar trend as seen in the case of CPI.
If we look at the YoY growth trends of per capita NNP in current prices and the Consumer Price Inflation index, we will see that it shows a convergence between per capita income growth and inflation growth in the years immediately after 2008, i.e. 2008 to 2010.
In this period, inflation was rising rapidly due to the impact of food and oil prices, while income was slowly declining as the economy slowed down due to a freeze on capex investment by Indian companies.
From 2011 to 2013, the dip in income growth became steeper as the economic slowdown took a stranglehold, while inflation became flattish following some urgent steps by the then-government in controlling gold imports. Resultantly, the differential did improve in these two years.
However, this was not really sustained, and the differential declined even further than earlier lows. In the fiscal years 2013 and 2014, inflation may have remained flattish on the back of the decline in oil prices and commodity prices globally, but income levels have not really picked up as yet, and this has led to the negative growth in real income growth as seen during those years.
Income growth remains an area of concern, since this largely depends on an uptick on the level of economic activity and job creation, which in turn are factors of the revival of the investment cycle by Indian and foreign companies into India projects.
The new government has been taking decisive steps by showcasing India as an investment-friendly country to Indian and foreign companies, and fast-tracking project approvals and processing.
Indians may have benefitted from economic liberalisation policies over the last few years, but that need not necessarily translate into sustained growth in real incomes. The average Indian wallet actually became poorer between FY2008 to FY2014.
Right now, Indians are waiting to see how the new government’s policies will address this critical socio-economic aspect of their everyday lives, just as the international context is becoming more complicated.
Sourajit Aiyer has written in over 30 publications globally and is the author of the E-Book “Flying with the Winged Elephant: Niche themes that may emerge in India for global businesses”. Views expressed are entirely personal.