Indian Economy: Optimism with caution
India is a shining star on the otherwise gloomy skyline. But we need to put in a lot of efforts in face of adversities. — KK Srivastava
According to NITI Aayog by 2047 (100 years after Independence) India will be a $30 trillion economy; currently it is the fifth largest economy with a GDP of $3.7 trillion. By 2030, India is likely to be the third largest economy overtaking Japan and Germany. S&P estimates that India’s nominal GDP will rise from $3.4 trillion in 2022 to $7.3 trillion by 2030. It is required that our economy grows at average of 9.2% per annum between 2030-2040, 8.8% between 2040-2047, and 9% between 2030-2047.For this it will have to introduce comprehensive reforms that, inter alia, save India from falling into the ‘middle income trap’, i.e. a situation where by a middle income country finds it difficult to transition to a high income economy due to rising costs and declining competitiveness. Thus the economy will have to identify relevant verticals and the strategy for creating an ecosystem needed to hit the target. This will include creating and nurturing human capital, leveraging the India’s (vast) market potential, and improved export competitiveness. If India does all this within 100 years of India’s independence it will be labeled a developed nation.
According to IMF India’s contribution to global economic growth will increase to 18% over the next five years. India and China are expected to jointly account for half the world’s growth in 2023 and 2024, with India’s share being 16%.
India’s economic growth remains robust, thanks to both resilient domestic demand and large public capital expenditure. For FY24, according to IMF, India is likely to grow at 6.3%. India has been growing at a steady pace due to demographic dividend, digitization, etc. However, the pace could pick up further if more structural reforms are undertaken, FDI norms are eased, labour force is upskilled, and financial system is deepened.
According to Finance Minister, domestic macro fundamentals remain strong and are improving although we cannot afford to underplay downward risks from global uncertainties and weather issues. According to S&P brisk digital transformation and a rapidly growing middle class are expected to drive India forward. It will become the third largest economy by 2030, behind only US and China, and overtaking Germany and Japan.
All in all a picture of optimism, a picture perfect. But what about the near term scenario.
It is indeed true that indicators like corporate balance sheet, demand for residential properties, investment demand, etc. are on even keel. But the fact is that income growth has been persistently slow; this has led to very slow growth of private consumption and investment. And inflation is not being tamed. Are we suffering from paradox of thrift (as formulated by Keynes, the great 20th century economist)? In this situation, in a low growth economy people, out of fear, spend less; this generates less income, followed by less spend. Thus a vicious cycle emerges. Answer is No.
This is not the reality. In India currently not only that consumption is low, but so are savings (at less than 30% of GDP). In presence of high inflation real incomes are actually falling. High end consumer goods demand is growing (3 bed room houses and SUVs) but demand for motorcycles and other two wheelers is not as robust. Whatever people are spending, in absence of growing real income, is perhaps out of loans. This is not a good indicator. Thus warning signs must not be ignored – from domestic as well as from the external side. If we don’t take care of our short term, then, as Keynes said, in long run we are all dead. Hence a sense of jubilation on projected 6% plus growth rate (from IMF, S&P, other agencies) must meet with little trepidation. The projected vision document needs a reality check; we need to attain sufficient economic growth year after year – every year before we reach 2047 and take up to being called a developed nation.
Of late the aggregate global economic growth has been slowing. The pandemic of 2021 shook it all; we have not recovered since. The economic shock followed in the shape of upended supply chains and disrupted economic networks. The shock was compounded due to Russian invasion of Ukraine; this sent the commodity prices shooting. Inflation was going out of hands, so most central banks had to raise the benchmark interest rates. This led to dampened economic activity on one hand and volatility in asset markets on the other. And now the Israel – Hamas conflict. At least some, if not all of these factors, will certainly impact India adversely. World Bank as already rung the alarming bells.
The US central Bank has been driving up the US bonds yields. This will mean FPI funds, outflow from India. This will lead to rupee appreciation which in turn will lead to higher cost of imports, adverse balance of payments, and upwards pressure on domestic prices. Similarly if Israel – Hamas war engulfs other middle eastern nations (most of them oil production), then there will be uncertainly over oil prices, especially when 8.7% of our crude is imported, as world bank has pointed out in its latest study.
Not only that, while 6% plus growth rate is one of the highest in the world, remember even the visions document says that we need to grow at average 8% between now and 2047 so as to ensure prosperity for a wider cohort of the Indian population and escape the middle income trap. Thus pain points are many and remain there which act as hindrance between what can be and what will be actually achieved.
Purely from a short term perspective we have many obstacles to overcome, many of which ofcourse are imported. Thanks to the sluggish global demand therefore our exports are stumbling. Surprisingly while corporate balance sheets are healthy and the sector in great financial shape, as the FM wondered, it is a mystery why there are few signs of a broad based pick up in the investment cycle. Is it because there is lack of aggregate demand in the economy and therefore no incentive for the industry to undertake fresh investment? Rural demand is showing signs of sluggishness, for example.
A pointer is that while the labour force participation rate (LFPR) has inched upward, a significant portion is in the form of self employment. This means that the economy is not being able to create enough high quality jobs for the fresh ones entering the labour force. This is also borne out by the fact that demands for work under MGNREGA remains higher than even pre pandemic levels. Rural demand is under pressure; it was hit hard by the second wave of the pandemic and never really recovered from there. Unseasonal rains in the first quarter of 2023-24 resulted in significant crop damage, lower output, and loss of income. And as said earlier, many purchases of durables have been financed (on credit) which may lead to financial distress.
Thus we need to celebrate Diwali with cautions optimism. We are doing better than many others, including our rival-China. But this is still not good enough, especially when we have the lofty aim of being in the league of developed nations by 2047.
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