There is a reversal in India’s macro environment, says Chetan Ahya, chief Asia economist for Morgan Stanley Asia. Ahiya believes that increasing capital expenditures and improving productivity will lead to growth and job creation, which in turn will boost income and consumption. This virtuous cycle would see the country experience GDP growth averaging 7% between FY23 and FY26.
This may seem a shade of optimism given that the recovery is uneven, crude oil prices are rising and credit is not flowing as freely as it should. But it’s not a totally unreasonable expectation.
With the sharp recovery in residential real estate, there is purchasing power waiting to be tapped into. Companies have already begun to commit to capital projects, such as steelmakers. It helps a lot more if the Indian companies are not borrowed and there are surpluses which can be employed in new ventures. CRISIL estimates that capital expenditures by industry could increase by 30% between fiscal year 22-24. While this is undoubtedly beneficial, manufacturing accounts for only about 15% of GFCF (gross fixed capital formation). Also, those who argue that mechanization will limit employment opportunities are probably right. However, we need to promote high-tech manufacturing, such as in ACC batteries, because this is also important.
If employment is to get a boost, the service sector needs to get back on track. We are already seeing a recovery in transportation, hospitality, travel and tourism, and as the economy opens up, many of the jobs lost will return. The formal job market, however, is doing well with the IT, BFSI and pharmaceutical sectors employed in large numbers. It is the small businesses in the unorganized sector, which have been hit hard by the pandemic, that have left millions without work.
The good news is that real estate, which is a major economic stimulus with a 20% plus weight in the GFCF, has seen an impressive rebound. Both the center and the states need to help maintain demand through rapid support measures such as lower stamp duties and larger tax credits on home loans. Between real estate and infrastructure, the construction sector can advance. Already, a host of infrastructure projects have dramatically improved connectivity via roads and railways. This will be a huge driver for the economy in general, but especially for exports and e-commerce; Both are an important part of the economy given their ability to create jobs. In fact, India now has a thriving digital economy, which is largely financed by external capital. E-commerce and startup spaces span a range of industries, from food to financial services, and from education to hospitality. These companies employ thousands – both blue-collar and white-collar employees – and spend significant sums on building and running their businesses.
Pranjul Bhandari, chief economist for India, at HSBC recently wrote that by boosting the consumption pie, e-commerce alone could add 0.25 per cent to India’s GDP growth annually over the next decade, even if the breakthrough hits halfway with China. Bhandari believes that the benefits to the economy can be significant “through a cultural shift in favor of entrepreneurship, growth and jobs”. As we have seen, cheap data and internet access will and will improve productivity.
Exports are at a very important stage of the current recovery. It will be difficult to achieve sustainable GDP growth without strong exports. For the good track to continue, and not just a passing picture, New Delhi’s trade policies need to be well thought out, to help Indian exporters gain a stake at a time when many countries are reassessing their dependence on international supply chains. . Higher tariffs have to go; Over the past few years, tariffs have been raised on 60% of imported goods and a high average tariff of 17% hurts. India must reassess whether it needs to be a member of trade blocs such as RCEP. Sure, many FTAs are being evaluated right now, but it’s critical that we make good deals and support exporters by dropping tariffs on the parts they need for their products. India should strive to move into the space vacated by China.
Unfortunately, the economy is still faltering due to limited credit. Banks are still risk averse, and seem to only lend to individuals and large corporate borrowers. With many non-bank financial firms out of business, the pool of credit – for non-AAA borrowers – is getting smaller. There is no doubt that microfinance institutions and microfinance institutions cater to the needs of small borrowers, just as fintech companies do. But they are not likely to be able to bridge the gap usefully, and we need to make sure that credit reaches more small businesses rather than just the big ones. Otherwise, MSMEs – already hit by the COVID-19 pandemic – will struggle even worse. Some of this is reflected in the decline in consumer confidence measured by the RBI survey. Since the informal sector is the largest part of the economy, accounting for 90% of jobs, it urgently needs reform. Demand from the formal sector, which is doing well now, may increase investment – even if capacity utilization is only 70% – but only to a certain extent. Beyond that, if growth is to pick up at the desired pace, we need demand from the informal sector to start working. One hopes that the effect of the downward flows will continue, to get the informal sector out of the predicament it has fallen into.