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Build momentum on early signs of robust recovery

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The domestic conditions are ripe for India to undertake its next growth wave. (File image)

The domestic conditions are ripe for India to undertake its next growth wave. (File image)

It is popularly said that India has a record of disappointing both its pessimists and optimists. While this may have been true to a lesser extent in the post-liberalisation years, it still has a ringing truth to it.

Some heavy lifting in reforms undertaken in the areas of bank clean-up, ease of doing business, ease of exit, real estate regulation, and taxation have started showing real-world impact. This has been catalysed by the COVID-19-induced global reset. The geopolitical recalibration, along with the government’s push for self-reliance in key sectors through its Performance-Linked Incentive (PLI) scheme, has potentially brought in a unique opportunity for the economy. The extensive infrastructure build-up through upgrading ports, roadways, and railway freight networks will facilitate India’s interior regions to play a critical role in the ‘China +1 strategy’.

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These potential shifts were well documented when Morgan Stanley recently predicted a ‘coming decade of outperformance’ for India. They forecast that that ‘India will be the third-largest economy by 2027, with its GDP more than doubling from the current $3.4tn to $8.5tn over the next ten years’. To understand this better, one would have to realise that it took India nearly three decades since liberalisation to add $3 trillion to its economy. According to Morgan Stanley, adding the same amount will only take another seven years. Given the overtly bullish nature of the report amid fears of an incoming global slowdown or even a possible recession, the report sparked quite a debate online.

Given that the business of long terms economic predictions hasn’t had too much credibility going for it, we try to look at shorter-term indications marking this shift. There are four major trends pointing to a robust recovery.

One: The high-frequency indicators are all pointing towards an upward trajectory. The gross GST revenue collected in the month of October is ₹1.51 lakh-crore, the second-highest so far. This is the ninth consecutive month when the GST revenues have breached the ₹1.4 lakh-crore mark signalling buoyant consumer spending consistently. Car sales have seen new records, with the September sales figure at 350,000 units being the highest ever for any month. Within this, the highest growing segment has been the higher-priced SUVs, pointing at increasing purchasing capacity. India’s industrial output has registered a 7 percent year-on-year growth in the first half of FY23. The Index of Industrial Production (IIP) rose to 3.1 percent in September, beating expectations.

Two: The pace of credit growth has been scorching. MSME credit has registered nearly 30 percent growth for six months in a row. Trade and NBFC credit have registered 21.3 and 30.6 percent growth, respectively, in line with previous months. Even personal loans such as housing as registered over 16 percent growth over the last four months. According to a Crisil report, corporate credit (45 percent of overall credit) may grow at a two-year compound annual growth rate (CAGR) of 10-12 percent up to March 2024. This is a sharp increase as compared to a mere 3 percent growth between fiscal years 2019 and 2022.

Three: The aforementioned credit growth to corporates at the fastest pace in more than eight years signals the commencement of a new private investment cycle. The suppressed private capex has been a teething issue for the past decade. This has been attributed to the mounting indebtedness of India Inc. and banks due to indiscriminate lending and subsequent weakened demand post the 2008 global financial crisis.

Over the past two years, corporations have optimised costs and raised equity capital, thereby generating additional capacity for investment as demand has strengthened. Crisil estimates that ‘Annual capital spending for India’s 15,000 largest industrial companies will be ₹4.5 tn ($55 billion) in FY23 and ₹5 tn ($62 billion) in FY24’. The private sector capital expenditure will see a robust revival. This will further be augmented by $80 billion impetus of the government on infrastructure development in FY23.

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Four: The PLI scheme has been a resounding success story in its early stages, especially in the key electronics and mobile manufacturing sector. India is the planned manufacturing hub for iPhones in Apple’s plan to move to manufacture outside China. The company’s global partner Foxconn plans to quadruple its workforce to 70,000 in India. It has started manufacturing iPhone 14 in its Chennai facility, producing the latest version in India for the first time in the same calendar year. The South Korean-based giant Samsung has developed the world’s biggest mobile manufacturing facility in Noida, Uttar Pradesh. With a 126 percent increase in output from FY21, India has emerged as the second-largest mobile phone maker in the world in FY22. According to Crisil, the government’s PLI manufacturing-subsidy programme is responsible for around a quarter of current capital spending by India Inc., and is also expected to fuel the private capex cycle.

It is critical to further build momentum on the early signs of a robust recovery. This is the role that can be fulfilled with a State-level policy orientation supporting the growth of domestic industries. More should be done to increase the access to formal credit substantively to the MSMEs, partly backstopped by the government.

Further, reliable and low-cost electricity tariffs, efficient last-mile transportation networks, and a business-friendly regulatory environment should be ensured. These conditions are primarily dependent on the policies of specific state governments. Instead of waiting for such conditions to arise, the Union government can incentivise lower-end industries through similar schemes such as the PLI. Such support acts as a viability gap funding till the time these idyllic conditions arise. The final nuances of how such incentivisation could work can be an ongoing process of self-improvement.

Despite global headwinds, an uncertain geopolitical environment, and sustained high oil prices, India has managed to record decent growth numbers. This has been primarily attributed to robust domestic consumption demand. As per a recent report by FICCI, the average capacity utilisation in manufacturing is at over 70 percent, pointing towards the uptick in economic activity. With the major firms sitting on large cash reserves, bank balance sheets cleaned, and credit growth outpacing the previous year by over two times, India is rightfully poised for the next cycle of private investments.

The West went overboard with its stimulus during COVID-19 in 2020, and is currently reeling under its effects. India does not face similar pressures to recalibrate its cost of capital through interest rates, given the manageable levels of inflation. We need to actively manage the sustainability of our current account deficit by hedging through oil futures. Even with a global slowdown, domestic conditions are ripe for India to undertake its next growth wave riding on its domestic demand. These value chains can gradually be externally directed towards exports in line with the next eventual global growth cycle.

If deftly managed, the scenario brings an unprecedented opportunity for India to only  disappoint its pessimists.

Chirag Dudani is Assistant Consultant, and Aditya Sinha is Additional Private Secretary (Research), Economic Advisory Council to the Prime Minister. Views are personal, and do not represent the stand of this publication.

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