In an earlier column in this paper, we pointed out that expectations of a sharp revival in large-scale investments post elections in 2014 are misplaced (“Elections won't trigger revival”, December 12, 2013, goo.gl/h3drK6).
Middle-income consumption growth is also likely to stay subdued. Stagnant wages due to a weak formal economy are being exacerbated by sustained high inflation and a delayed supply response in white-collar workforce (courtesy of the boom until 2010). A useful indicator of these trends in the private sector is the real wage of an entry-level engineer entering an IT company. After keeping pace with inflation until 2008, real wages have almost halved in the past five years, so much so that an entry-level engineer now takes less cash home than a taxi driver in Mumbai. This is unlikely to change until the formal economy recovers. For the one-third of the middle class paid by the government (state, central and municipal governments as well as government owned companies), the government's pay commission cycle (every ten years: next one due in 2016) drives consumption cycles, and the 7th Pay Commission won't affect salaries until 2017-18.
There will be volatility around the elections, certainly, but the market should revert to trend soon after—history suggests elections do not really change the direction of the market.
So, what really is the trend? Does the continued weakness in large-scale investments and middle-income consumption mean the economy and the markets will continue to drive negative headlines? In my view, the big story will be the continuing divergence in fortunes of large-scale investments and middle-income consumption on the one hand, and low-income consumption on the other. Growth in the informal economy will continue to drive wage growth for the poor.
Continuing expansion in rural roads and electrification and the spread of mobile phones is driving unprecedented change and job creation away from the big cities. Analysts ignore the growth in rural wages at their own peril, as this affects the bulk of India’s workforce. Ninety percent of employment in India is informal, and rural wages are the best proxy for the strength of this economy, as wages for low-end urban jobs are closely linked to rural wages. Although growth in rural wages dipped to 14% in July, it was back to 16.4% in September, and is broad-based enough to suggest July was an aberration. We expect growth in real terms to stay at 4-5% over the