Morgan Stanley Chief Asian Economist Chetan Ahya says there is a shift in India’s macro environment. Ahya believes that increasing investment spending and improving productivity will lead to growth and create employment opportunities, which in turn will boost income and consumption. This virtuous circle will see the country register a GDP growth of 7% on average between FY23 and FY26.
This may sound a little optimistic given that the recovery is patchy, crude oil prices are skyrocketing, and credit is not flowing as freely as it should. But that’s not an entirely unreasonable expectation.
In view of the strong rebound in residential real estate, there is still purchasing power to be exploited. Companies are already starting to commit to capital expenditure, steelmakers for example. It helps a lot more if Indian businesses are not operated and there are surpluses that can be used in new ventures. CRISIL estimates that investments by industry could increase by 30% between fiscal years 22-24. While this is undoubtedly useful, the manufacturing sector only accounts for around 15% of GFCF (gross fixed capital formation). Moreover, those who claim that mechanization will limit employment opportunities are probably correct. Nevertheless, we must promote high-tech manufacturing, such as in ACC batteries, because that too is important.
To boost employment, the service sector must get back on track. We are already seeing a recovery in transportation, hospitality, travel and tourism, and as the economy opens up, many lost jobs will return. In any case, the formal labor market is doing quite well with the IT, BFSI and pharmaceutical sectors which are hiring in large numbers. It is the small businesses in the unorganized sector, hit hard enough by the pandemic, that have left millions of people out of work.
The good news is that real estate, a big catalyst for the economy with a significant weighting of over 20% in GFCF, has seen a stunning rebound. The center and states must help support demand with measures such as lower stamp duties and greater tax breaks on home loans. Between real estate and infrastructure, the construction sector can get a head start. Already, a series of infrastructure projects have dramatically improved connectivity via roads and railways. This will act as a big boost for the economy in general, but especially for exports and e-commerce; both are essential parts of the economy given their potential for job creation. Indeed, India now has a booming digital economy, largely financed by foreign capital. E-commerce and start-up spaces are spread across a wide range of industries, from food to financial services, education to hospitality. These companies employ thousands of blue-collar and white-collar workers and spend large sums of money to start and run their businesses.
Pranjul Bhandari, Chief Economist, India, at HSBC, recently wrote that by increasing the consumption pie, e-commerce alone could add 0.25 ppt to India’s annual GDP growth over the course of the next decade, even if penetration catches up halfway with China. The economy-wide benefits, according to Bhandari, could be significant “in the context of culture change, growth and jobs conducive to entrepreneurship.” As we have seen, cheap data and Internet access have improved and will improve productivity.
A very important stage in the current recovery has been exports; it would be difficult to achieve sustained GDP growth without strong exports. For the good race to continue, and not just for a simple jolt, New Delhi’s trade policies must be well thought out, in order to help Indian exporters gain share at a time when many countries are reassessing their dependence on chains. international sourcing. High tariffs must go; In recent years, tariffs have been increased on 60% of imported items, and the high average tariff of 17% hurts. India needs to reassess whether it should be a member of trade blocs like RCEP. Certainly, several free trade agreements are currently under evaluation, but it is essential that we do good business and support exporters by lowering tariffs on the parts they need for their products. India must strive to settle in the space left vacant by China.
Unfortunately, the economy remains hampered by limited availability of credit. Banks remain risk averse, apparently only lending to blue chip retail and corporate borrowers. With several NBFCs going out of business, the credit pool – for non-AAA borrowers – is smaller. SFBs and MFIs undoubtedly meet the needs of small borrowers, as do fintechs. But they are unlikely to be able to close the gap in any meaningful way, and we need to make sure that credit reaches more small businesses rather than just the best businesses. Otherwise, MSMEs – already battered by the Covid-19 pandemic – will have a harder time. This is partly reflected in the low 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 to be fixed. Demand from the formal sector, which is currently doing well, can drive investment up, even if capacity utilization is only 70%, but only up to a point. Beyond that, if growth is to accelerate as desired, we need demand from the informal sector to get started. It is hoped that the ripple effect will occur, to get the informal sector out of the rut into which it has fallen.