What GDP data doesn't show: Structural weakness and real living standards

India has not made enough progress in improving living standards. While the country has climbed international rankings, the progress remains slow

The latest gross domestic product (GDP) data shows India’s economy is recovering, with growth rising from 5.6 per cent in July-September to 6.2 per cent in October-December, and an estimated 7.6 per cent in January-March. At this pace, India is set to become the world’s fourth-largest economy. However, before we start celebrating, we need to examine the economic situation more carefully. Upon doing so, we’ll find significant weaknesses, indicating that substantial policy work remains.

 

To begin with, investment remains too weak to drive rapid growth. In 2024-25, real investment is expected to rise by a mere 6 per cent, trailing economic expansion. In contrast, investment during the 2004-2007 boom grew by 15 per cent annually, accounting for 40 per cent of GDP. Now, it stands at just 33 per cent.

 

Even more concerning, the supposed growth acceleration disappears when considering long-term trends. For 2024-25, growth is expected to be 6.5 per cent, significantly lower than the 8.8 per cent average after Covid. This is corroborated by high-frequency indicators, including slower retail sales, declining credit growth, weak corporate earnings, poor goods exports, a drop in net foreign direct investment, and a sharp fall in core inflation.

 

To understand the current state of the economy, we must look back a few years. Before Covid, growth had fallen below 4 per cent, with the economy in poor shape. The unorganised sector struggled due to demonetisation and poor implementation of the goods and services tax, while the organised sector was still recovering from excessive borrowing during the boom. Many of these issues remain unresolved. However, after Covid, they were less visible because the economy was boosted by several temporary factors.

 

One such factor was the normalisation of activity as people returned to work and households resumed spending after the lockdown. The consumption revival was fuelled by a surge in retail credit, which grew at an annual rate of around 20 per cent for several years.

 

A second factor was the government’s infrastructure push, with spending growing at an average rate of 30 per cent between 2021-22 and 2023-24, further boosting the economy.

 

The most important factor, however, was the rise of a “New Economy”. The growth of Global Capability Centres (GCCs) set up by multinational companies led to a remarkable 65 per cent increase in service exports over the three years ending in 2023-24. The windfall income of nearly 2 million GCC workers was spent on SUVs and luxury real estate, sparking boom in the auto and construction sectors, with the latter growing in double-digits in real terms over the same period.

 

Over the past year, these temporary factors have faded. The boost from the economy’s reopening has disappeared, and as fiscal constraints tightened and diminishing returns set in (e.g., from building airports in smaller cities), the government has reduced infrastructure spending. Service export growth also slowed to below 10 per cent between April-June 2023 and April-June 2024 as GCC expansion levelled off.

 

In other words, conventional wisdom is mistaken. The post-Covid boom was the anomaly, while the recent slowdown represents a return to normal—a reversion to the economy’s long-term growth rate, which has averaged around 6 per cent since 1991.

 

We need to ask: Would a long-term growth rate of 6 per cent be enough to meet the country’s needs? It’s hard to believe it would. Even recent above-trend growth hasn’t created enough jobs. There are deeper, structural issues that may suppress demand longer than expected. According to the Centre for Monitoring the Indian Economy, only 420-430 million of India’s 1.1 billion working-age people are in the labour force, either employed or seeking work. While the working-age population has grown, the labour force has not, causing the participation rate to drop from 46 per cent in 2017-18 to 40 per cent in 2023-24. Only a small portion of those in the labour force have formal sector jobs, highlighting a serious jobs crisis. Middle-class Indians have also faced stagnant nominal wage growth. With average inflation at 5 per cent, real wages have often declined, weakening demand.

 

India has also not made enough progress in improving living standards. While the country has climbed international rankings, the progress remains slow. In 1980, India ranked 142nd in real GDP per capita out of 167 countries. Twenty years later, it moved up to 124th, and another 20 years later, it reached 109th. However, this still places India far behind most other economies.

 

Ultimately, the size of the economy as given by GDP and its post-Covid growth rate are misleading. What truly matters is the long-term growth rate as it will determine how quickly per capita incomes reach comfortable levels. The urgent need now is a strategy to accelerate growth—a plan that tackles the country’s deep structural issues, enabling the economy to take off sustainably and for good. 

Year	1970	1980	1990	2000	2010	2018	2022
No. of countries with data available	153	167	169	169	169	169	169
India	130	142	127	124	122	115	109
Brazil	71	67	71	63	74	78	77
China	127	128	117	106	90	81	64
Indonesia	111	117	104	97	98	90	87
Japan	20	17	5	19	26	24	28
Mexico	47	53	60	55	69	68	74
South Africa	54	73	83	78	82	86	93
South Korea	89	88	37	33	33	27	23
USA	4	3	1	4	8	9	8

 

The author is associate professor of economics, IGIDR, Mumbai