A woman talks on her phone as she walks past a under-construction Amrapali housing project in Noida, Uttar Pradesh, India on Saturday 20 January 2018. Photographer - Anindito Mukherjee/Bloomberg
For the past decade, many middle-class Indians have been paying rent as well as mortgages on flats that were never completed, leaving little for discretionary purchases © Bloomberg

Kaushik Sengupta, 45, a product development manager for an export-oriented shoe manufacturer, is the kind of middle-class Indian whose family’s consumption should be helping power the economy.

But his decision in 2009 to buy a Rs2.4m flat from an ostensibly reputable property developer, who promised it would be ready in two years, proved a financially crippling mistake.

Today his unfinished flat on New Delhi’s outskirts is one of the estimated 465,000 residential units across India that were sold but never completed as property developers confronted regulatory issues, litigation over land titles or simply ran out of money.

For the past decade, Mr Sengupta, like many others in his situation, has paid both a mortgage and rent, which together eat up around half of his Rs80,000 ($1,109) monthly salary. The rest goes on food, school fees and other household necessities, leaving little for discretionary purchases.

“I end up with nothing in my hand to spend,” he said. “It’s a disaster.”

He is not alone in this gloom. After a surge of national optimism following Prime Minister Narendra Modi’s first election victory in 2014, many Indian families have lost confidence in their economic prospects. 

As they confront challenges ranging from an urban real estate crisis to a rural income squeeze and persistent lack of job opportunities for young people, India’s households are engaging in a collective belt tightening that has undermined economic growth. 

India’s gross domestic product growth is in its fifth consecutive quarter of deceleration, figures published last week showed, tumbling to a six-year low of just 5 per cent year-on-year between April and June. That was down sharply from the disappointing 5.8 per cent in the first three months of 2019, and from 8 per cent in the same quarter the previous year. 

One of the biggest drags on growth was a sharp deceleration in private consumption, which had been one of the economy’s major growth engines over the past few years. Private consumption grew just 3.1 per cent year on year from April to June, down from 7 per cent growth in the previous quarter. On a quarter-on-quarter basis, private consumption contracted 6.7 per cent. 

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The shift has been exacerbated by a withdrawal of previously easily available consumer credit from now-ailing non-bank lenders. 

“Consumers in rural and urban areas have reached the point where they cannot see any income growth,” said Sunil Kumar Sinha, principal economist at India Ratings and Research. “Whatever little hope they had that things will improve is gone, and households have put a sudden break on their consumption.” 

As a result, manufacturing has taken a hit. Its growth tumbled to 0.6 per cent year on year, with the car industry suffering a severe contraction leading to hundreds of thousands of job losses.

The grim data have stunned analysts, many of whom have now sharply lowered their growth forecasts for India’s economy for the current financial year to about 6 per cent, and prompted a rare public rebuke from Mr Modi’s predecessor, Manmohan Singh. 

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“The state of the economy today is deeply worrying,” Mr Singh, the former prime minister, said in a video issued by the opposition Congress party after the GDP data were released. “India has the potential to grow at a much faster rate. But all around, mismanagement by the Modi government has resulted in this slowdown.”

New Delhi has downplayed the magnitude of the economic change, pinning the blame on a deteriorating international economic environment stemming from trade friction between the US and China. It has emphasised that India is still growing faster than many developed economies. 

Economists say India’s economy is likely to show slight signs of a pick-up in the second half of the financial year.

But, many say, getting growth to reach its potential rate of 8 per cent will require more profound structural reforms to improve the business climate and tackle serious long-term challenges including a persistent lack of job creation that constricts household budgets and undermines long-term savings rates. 

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Household savings — the biggest component of a nation’s overall savings rate — have fallen from 23 per cent of GDP in 2012 to 17 per cent this year. Household indebtedness rose from 9 per cent to 11 per cent of GDP in the same period.

“India’s fundamental problem is that employment growth and GDP growth are not working in sync,” said Ritika Mankar, an economist at Ambit Capital. “As a result of this, the pace of savings is just not growing, and the savings-to-GDP ratio has in fact been coming under pressure.” 

Ms Mankar said lower savings led to a higher cost of capital which then damped down investment. “There is just not enough money available at affordable rates.”

Meanwhile, Mr Sengupta, straining to pay both rent and a mortgage, is pessimistic about his personal prospects. When Mr Modi was first elected in 2014, he had hoped for a solution to help so-called stuck homebuyers like him. That hope has dissipated. 

“Everybody voted in 2014 thinking that whatever mess they are in will be sorted out,” he said. “But the government is not intervening or coming on to the scene. On the ground, the reality is that nothing constructive is coming out.”

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