It is certainly a great time to be in India for business. A democratic political system, stable governance, liberalized economy, demographic advantage, consumption trends, upgrading infrastructure and a strong financial sector embodied by robust regulators are contributing to India’s economic resilience. In an uncertain world, where economists are still grappling with whether the US will experience a soft landing or when China will come out of its current rout, India’s growth trajectory is relatively clear. It is well on its path to becoming the third largest economy within 48-54 months, and reaching the $10 trillion target by 2035.
Global confidence in India has been reiterated even by credit rating agencies, despite their reluctance to upgrade its sovereign rating. Over the last few days, agencies like Moody’s and Fitch revised their growth forecast upwards. Fitch now expects FY2025 GDP growth to be at 7 percent (from 6.5 percent expectations earlier) and Moody’s expects FY2024 economic activity to rise by 6.8 percent (from 6.2 percent expectations earlier). However, these upgrades are yet to be reflected in their rating stance. At BBB-, India is clubbed with smaller nations with either poor debt repayment histories or heavy exposure to foreign debt like Hungary, Greece, Romania and Mauritius. Incidentally, India does not have such problems, and maintains a small current account deficit, a credible fiscal consolidation roadmap and the 5th largest GDP.
One of the major reasons for this upgrade is India’s stellar 8 percent+ real GDP growth in the first 3 quarters of FY2024. It has been the highest across all G20 nations, and if the forecasts turn out to be true, it will remain so for the next few years as well. But the question is whether its economic growth is mirrored within its human development indicators as well. Because only if growth and development are in lockstep can a virtuous cycle of sustained advancement be established.
To answer this, let us take a closer look at the latest GDP estimates first. The Central Statistical Office (CSO) estimated that India’s real GDP grew 8.4 percent in the Dec ’23 quarter, compared to the same time last year. However, at a time when the government estimated a less than expected fiscal deficit in FY2024, and with limited evidence of any material rise in private capex, an 8 percent+ growth rate should appear slightly out of context. The answer lies, as pointed out by some fellow economists, in the rising divergence between Gross Domestic Product (GDP) and Gross Value Added (GVA). In simple terms, GDP includes GVA and indirect tax collections (net of food, fertilizer and fuel subsidies). In Q3, there was a slowdown in the government’s subsidy spending while GST earnings continued to remain buoyant, leading to a significantly large alpha over and above the GVA in the form of net indirect tax inflows. On an average, in Q3, food subsidies contracted 50 percent compared to the same time last month. At the same time, central GST inflows increased 8 percent. Consequently, GVA, which is a better reflection of actual production across agriculture, industry and services, grew only by 6.5 percent in Q3, compared to 8.4 percent GDP growth. This alpha is technically the government’s earning, and will have a positive impact once spent. It will certainly benefit bond yields, but they are not reflective of the gains in Q3.
Now that I have explained that India’s actual economic activity may not have increased 8.4 percent, let us expand the GVA to get an indication on real growth. Agriculture, industry (manufacturing + mining) and services are key components of GVA. As per Dec ’23 data, agriculture contracted 1 percent (vs 2 percent growth in Q2), industry grew 10 percent (vs 14 percent growth in Q2) and services grew 7 percent (vs 6 percent growth in Q2). The decline in agriculture is particularly worrying, especially because post-Covid, agriculture and public capex were the two pillars supporting the economy. With both on a downward trajectory, services and industry need to step up their growth projectiles to maintain India’s overall economic momentum. This means a resuscitation in the private capex cycle has become even more important to replace the shortfall from slowing government expenditure.
Recent media reports have been buzzing with high spending plans from leading corporate houses to this regard. Once larger corporates initiate the capex cycle, smaller players including MSMEs will be automatically crowded in. As a prerequisite, though, our financial system needs to ensure adequate availability of capital and smooth credit flow to the last mile of the economy. It is estimated for a sustained real growth of 8 percent+, credit offtake should grow at 18 percent consistently.
Capital has always been a bottleneck in India’s development, owing to a homogenous financial ecosystem over-reliant on banks. Alternative sources of capital like NBFCs and the debt market are also dependent on bank credit. Urgent policy interventions are necessary to break this homogeneity. India’s NBFC sector needs to be better utilized. Allowing deposit taking licenses to large and well managed NBFCs (some already have them) can be a solution. Cheap capital through public deposits will lead to lower borrowing costs for NBFC clients, often segments left out by banks, but hold strategic relevance for growth and development.
To conclude, it is necessary to focus on both growth and development. There are vast pockets within India that fall way behind the UN’s Sustainable Development Goals (SDG) on health, nutrition, education, water resources, financial inclusion, skill development and infrastructure. Economic growth alone may not be sufficient to fill these gaps. The Indian government has chalked out a road map for the 112 Aspirational Districts deemed to be most backward and largely dependent on primitive agriculture. Rapid investments from public and private sectors are necessary to translate India’s high growth to meaningful human development. Only then can our Human Development Index rise to levels worthy of a developed nation. Our private sector and financial system should gear up to enable this effort for a more equitable growth benefiting all of India.
Debopam Chaudhuri
Chief economist, Piramal Enterprises
(Views are personal)