Orissa is set to get about one lakh crore rupees in investments from steel companies. And that will create one lakh new jobs, giving a steady source of income to one lakh families in the state. About one-third will be directly employed by the steel plants and the remaining will get employed through a multiplier effect.
So, here’s the equation. Three crore rupees creates one direct job and another two jobs indirectly. You don’t have to look any further to see why the latest growth estimates look like they do.
GDP growth estimated for 2007-08 might be slightly lower than what was anticipated but that’s hardly the statistic to be worried about. The worrying number is the growth in household consumption expenditure - just above 6.5 per cent. So, an economy growing at nearly 9 per cent can’t generate consumption growth of even 7 per cent.
On the other hand, everyone reading this article must have experienced exactly the opposite in the past one year. Their consumption expenditure has surely grown faster than their income. That’s because all of us who speak in English, surf the Net and read columns about the stock markets have done well for ourselves in the past few years.
We’ve all basked in a wealth-effect, which has given us the confidence to spend now in anticipation of future earnings. Look at your latest credit card bill and you will understand what I am talking about.
Then how did household consumption expenditure grow at such a low rate? That’s because the lower you go down the income ladder, consumption growth has been slower and slower. And below a certain level it might even have been negative.
On the other hand, the CSO’s latest estimates show investments have growing at more than 35 per cent this year. That only proves what some of us have been saying for the past one year - that the India story is largely investment-led. The stock markets have also paid rich dividends to anyone who held this view. Engineering, infrastructure, construction, mining, power stocks have been multi-baggers while anyone backing FMCG, auto, consumer durables has ended up losing money.
But here’s the danger. Investments can be of two types - public and private. Public investments are funded by taxes, PSU profits and government borrowing. Private investments are funded by corporate profits, borrowing and money raised through IPOs. So when private investment growth is five times faster than household consumption it shows the returns to capital are growing at an inordinately faster rate than the wage bill.
When that happens, additional consumption demand can only come from those who have a right over the returns to capital. That could be owners of capital, managers, people earning high interest income or getting high returns from the capital markets. When growth is not accompanied by job creation the size of the consuming class is bound to be limited. And, ultimately without consumption there can’t be any real growth.
Let’s also look at this from the supply side. To simplify matters let’s break the productive sector up into two departments. The first is a producers goods department, which includes infrastructure and capital goods. The second, a consumer goods department, which includes FMCG, consumer durables, etc. Right now, the first department is growing because of capex in both departments. But as consumption slows down capex in the consumer goods department will also slow down. That, in turn, will cause a slowdown in the producers goods department as well.
When that happens, even the existing ‘buying’ classes will start shrinking at the margins and there will be an overall decline in demand. In my opinion, we are already deep into the first stage of this down-cycle. It’s a matter of time before the second stage starts as well.
Once that happens, the RBI will be under pressure to come out as the saviour. Easy credit might give another spurt to consumption and investment, starting off another up-cycle. This is what the US Fed has been doing for the past decade or so, creating several mini-credit bubbles which all come together to make an ever-expanding mega-credit bubble.
For the first time in two decades, the establishment in the developed capitalist world - including the IMF - has started questioning this growth model. Back home, the RBI has been its biggest critic and the only central bank, which has refused to follow the Fed’s lead. Hopefully, its resolve won’t be shaken by a little slowdown in India.
