Deconstructing India's GDP: A Deep Dive into Key Domestic Growth Drivers

India's GDP numbers are closely watched by economists, policymakers, and investors around the world. The Gross Domestic Product (GDP) represents the total value of all goods and services produced within the country's borders over a specific period, typically a year. India's Gross Domestic Product (GDP) serves as a barometer of its economic health, reflecting the nation's overall economic performance. While GDP figures often grab headlines, delving deeper into the composition of GDP can unveil crucial insights into the economy's underlying dynamics. In this article, we'll embark on a journey to deconstruct India's GDP numbers, with a particular focus on its domestic GDP.

Additionally, we'll scrutinize the top sectors contributing to domestic GDP and examine two critical contributors to the domestic growth story of India – the evolving role of women in the workforce and the ratio of household savings as a percentage of GDP over the years.

Understanding India’s Domestic GDP

India's GDP is composed of two main components: domestic GDP (almost 79-80%) and net factor income from abroad (almost 20-21%). Domestic GDP, also known as Gross Value Added (GVA) at basic prices, measures the value of goods and services produced within the country's borders, excluding taxes and subsidies. It is a critical indicator of the economy's performance and is used to assess the contribution of different sectors to overall economic growth.

Breakup of Top Sectors in India’s GDP

India's GDP is driven by a diverse range of sectors and industries. Some of the key sectors contributing significantly to domestic GDP include:

Services Sector: The services sector is the largest contributor to India's GDP, accounting for around 53.33% of the total. It includes sub-sectors such as IT services, telecommunications, banking, insurance, tourism, and healthcare.

Manufacturing Sector: The manufacturing sector is another crucial contributor, accounting for around 14.8% of the GDP. It includes industries such as automobiles, textiles, chemicals, and electronics.

Agricultural Sector: Although its contribution has been declining, the agricultural sector still plays a significant role, accounting for around 18.5% of the GDP. It includes crop production, livestock, forestry, and fisheries.

Construction Sector: The construction sector is a key driver of economic activity, contributing around 8% to the GDP. It includes infrastructure development, real estate, and urban development.

Electricity, Gas, Water Supply & Other Utility Services: This sector contributes around 3% to the GDP.

Mining and Quarrying Sector: This sector contributes around 2.4% to the GDP and includes coal, crude oil, natural gas, and minerals.

Let us try and understand what constitutes this domestic economy. Out of this 80% of domestic economy, almost 20% comes from government, public sector infrastructure, defence etc. So, this means that 60% of the Indian economy comes from domestic private consumption.

Now let us try and understand what is driving this domestic private consumption in recent years:

Ratio of Female Workforce Participation

Over the past five years, India has made strides in enhancing gender diversity in the workforce, albeit with persistent challenges and disparities. While exact figures may vary annually, there has been a gradual increase in the participation of women in the labor force across various sectors. Government initiatives such as Beti Bachao, Beti Padhao (Save Daughter, Educate Daughter) and Skill India have aimed to empower women economically and bridge the gender gap in employment.

The World Bank estimates that India's GDP growth would increase by 1% if the country's female labour force participation rate rose from 25% to 50%. The Periodic Labour Force Survey (PLFS), released by the Labour Bureau in October 2023, showed that women's participation has increased from 23.3% in 2017-18 to 37% in 2022-23. This is a huge milestone for India and a 60% jump in women’s participation rate in last 5 years, is one of the main reasons for jump in domestic consumption in the country.

In the latest round of PLFS (2022-23), another significant trend was observed, the proportion of self-employed women rose to its highest at 70.1 percent, up from 60 percent in 2021-22. The category of self-employed has two sub-categories in PLFS—own account worker and employer, and unpaid helper in household enterprises. More than half of the women worked as “unpaid helpers” in family enterprises. 

The share of self-employed female workers has always been higher in rural areas as compared to urban areas. Agriculture and allied activities account for three-fourths of the work that rural women are involved in. The increase in self-employed workers can also be interpreted as a sign of more women taking up entrepreneurship across the country. Under Pradhan Mantri MUDRA Yojana, which extends micro-credit for entrepreneurship, nearly 70 percent of beneficiaries are female, and 84 percent of loans sanctioned under Start-Up India have also gone to female beneficiaries. Both these programmes have been enabled through the drive for digital financial inclusion in recent years, which have been gender inclusive in design.

However, despite these efforts, gender disparities persist, particularly in traditionally male-dominated industries and leadership roles. Cultural norms, societal expectations, and structural barriers continue to hinder women's full participation in the workforce. Achieving gender parity remains a pressing imperative for India's economic development, requiring concerted efforts from policymakers, businesses, and civil society stakeholders.

India’s Household Savings Rate

The recent RBI data released in October 2023, shows that India’s household savings are at a five-decadal low, accounting for only 5.1% of the GDP. Information regarding yearly household savings is made available by the Central Statistics Office (CSO) in their January report known as the ‘First Revised Estimates (FRE) of National Income, Consumption Expenditure, Saving and Capital Formation.’ These figures are later updated in subsequent annual releases.

From a Flow of Funds (FoF) perspective, households have traditionally been considered a sector with a financial surplus. The RBI also publishes data on changes in financial assets and financial liabilities at current prices in its annual ‘Handbook of Statistics on Indian Economy’. The difference between financial assets and liabilities is taken to be financial savings, and it is measured as a percentage of GDP at current prices.

Data compiled from the RBI show that the current savings share of 5.1% is a 47-year low. It is slightly lower than the 5.23% during 1977-78. Between the 1990s to 2010s, the average savings stood at 10.4%, thereafter from 2011 to 2023, the average savings fell to 7.7%.

Does this mean that the Indian households have started saving less?

No. In absolute terms, gross household financial savings expanded by 13.9% year on year in 2022-23. This means that more income is going to those households which do not save. And which are these households? Mainly, the households where females have started joining the workforce!!

Another derivative of this increase in women workforce is the increase in the ability of the Indian households to borrow. This is reflected clearly in the steep increase in the cumulative household borrowings in India especially last year. According to the recent RBI Financial Stability report, financial liabilities of households have seen a rapid rise from 3.8% of the GDP in 2021-22 to 5.8% in 2022-23 even as financial assets moderated only marginally to 10.9% in 2022-23 from 11.1% in 2021-22. This increase in financial liabilities is mainly on account of financial borrowings from financial institutions, with a large part going in creation of physical assets like mortgages for property purchase and vehicles. This explains the increase in demand for affordable housing, white goods and vehicles, especially cars where the waiting period is anywhere between 3-12 months. This would directly add to gross capital formation, supporting an uptrend in private investment cycle, and eventually, the prospects for growth.

 Conclusion

India's GDP numbers offer valuable insights into the nation's economic trajectory, with domestic GDP serving as a cornerstone of its economic vitality. By examining the composition of domestic GDP and trends in workforce participation, stakeholders can gain a deeper understanding of India's economic landscape and identify opportunities for inclusive growth. Additionally, the gradual increase in the ratio of women in the workforce is a positive trend that can have significant implications for India's economic growth and development. This is a huge milestone for India and a 60% jump in women’s participation rate in last 5 years, is one of the main reasons for jump in domestic consumption in the country. This proves that the growth in domestic consumption is not because Indians have started to consume more but because more Indians have started to consume now!!

Moving forward, addressing structural challenges, and fostering gender-inclusive policies will be essential for realizing India's full economic potential and ensuring prosperity for all segments of society.