India: On The Growth Turnpike

Blowing away all estimates GDP growth came in at a staggering 8.2%, reaffirming the argument that India is on a new growth trajectory. EPISODE #179

Dear Reader,

A very happy Monday to you.

Last week, two events of note happened. The general election concluded with the 7th and final phase going to vote on 1 June.

A day prior, the union government released growth numbers for the Indian economy in 2023-24. It came in at a staggering 8.2%—I believe only the ninth time that the Indian economy topped 8%.

Is this an outlier? Or is this the beginning of a new trend rate of growth? This week I will try and answer these questions.

The cover pix is a collage of nature’s gift during the Delhi summer. They are taken by me. Enjoy.

Happy reading.

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The Q4 Surprise?

New numbers released last week reveal that the Indian economy clocked a very impressive 8.2% growth in 2023-24.

And this despite a marginal deceleration in the growth rate to 7.8% in Q4 ended March of the last fiscal year. In Q3 ended December 2023, the growth was provisionally pegged at 8.2%. This has been revised upwards to 8.6%!

Obvious question: Are these trends too good to be true?

Curiously, most analysts forecast a much lower growth rate for both Q3 and Q4. Twice in a row they have been surprised.

Implicitly, this divergence suggests that there is an underlying growth momentum which is either being underestimated or missed. Which is why the official growth numbers for the last two quarters of 2023-24 have been met with considerable scepticism.

I believe the Indian economy has done exceedingly well. Especially, if you factor in the unprecedented circumstances of three back-to-back economic shocks beginning in 2020: The covid-19 pandemic, Russia-Ukraine war, and the US-Fed’s decision to ramp up interest rates in a record fashion, resulting in an export of inflation to the rest of the world, including India.

In fact, the Indian economy, contracted by 5.8% in 2020-21. Check out the graphic below.

The rebound was quick though. More importantly, the recovery has sustained. While most analysts are bewildered, the official economists are not.

In an interview granted to me on the sidelines of an investor summit in Singapore in March this year, the country’s chief economic advisor (CEA) Anantha Nageswaran (click the link if you wish to read the full transcript) claimed India has reached a point of inflection in its development trajectory and that it could well close 2023-24 with a growth rate of 8%.

Responding to a query whether he was surprised at the Q3 GDP number, the CEA said (the bold text is my doing):

“We were not surprised, though a bit pleasantly (surprised) by the magnitude of the number. But we did not doubt the vigour of the economic growth. In fact, I remember very well saying that the growth data will be revised higher. We know that now, say for example in 2021-22, the growth rate was 9.7%, instead of 9.1% as reported earlier.

So I think we were convinced about the pace of recovery, and the sustenance of magnitudes. Nobody can say that we anticipated this magnitude. Yet, we are not surprised by the strength of the recovery. “

And, when I pushed him further and asked him whether the Q3 number was out of whack, especially in the context of what analysts were expecting, he added:

“No, certainly not.

On the contrary, I will even say that sometimes we do not really comprehend the lag effect of so many things that have been put in motion since 2016 – policies like the IBC (Insolvency and Bankruptcy Code), GST (Goods and Services Tax), etc.

And then when shocks like the COVID-19 pandemic and the Ukraine-Russia war, which caused oil prices to spike, start to fade away, the lagged effect of those things in transition come through in full force. And, we don’t fully account for them.

That is why we get taken by surprise when we see the magnitude. But then if you really understand that these things operate with a lag, and there is a pent-up effect that works, then you would not be surprised.”

Clearly, official economists are reading the tea leaves better.

The Investment, Consumption Worry

While the headline news is indeed encouraging, there is cause for concern on two counts. As you know so well, any economy has two components: Consumption and Investment (C+I=Y or income). Consequently, for any economy to grow in a sustainable fashion, it needs to fire on both cylinders as it were.

The Indian economy is no different. Unfortunately in India’s case the trends in both investment and consumption is worrying for differing reasons.

Let us begin with investment. The headline number is most impressive.

Investment, classified as Gross Fixed Capital Formation (GFCF) in national accounts, is at its highest since 2012-13—the point at which the Indian economy started to lose steam. Its share in GDP was 33.5% in 2023-24.

The problem here is that this is driven almost entirely by the government, which since the covid-19 pandemic has quadrupled capital investments in the economy. But this is not fiscally sustainable. The government has already stretched itself in providing the safety net for investment.

The economy needs private sector investment, which accounts for the overwhelming share of investment in the economy, to kick-in. In the post 2008 global currency crisis era, balance sheets of both, India Inc and domestic banks, had collapsed. In the decade since, this has been corrected, especially after the introduction of the Bankruptcy code and the economic recovery.

India Inc, is however reluctant to absorb the risks of investing in what is a new normal—constant volatility in global and hence domestic circumstances. According to the guest featured on the latest episode of StratNews Global (appended at the end of the newsletter), this is changing.

Guess, a lot depends on the outcome of the general election due tomorrow—a third term (as psephologists predict) for the incumbent, will ensure continuity of policy and more importantly much needed political stability.

Now, turning to the problem with respect to consumption. Its share in GDP declined from 58.1% in 2021-22 to 55.8% in 2023-24. And to a large extent this can be blamed on the economic shocks that devastated the Indian economy—causing large scale unemployment—as well as a bad year for Indian agriculture.

Growth in Indian agriculture, slowed dramatically from 7.6% in 2022-23 to 0.6% in 2023-24. This is indeed a cause for worry. Not only does Indian agriculture feed the nation (and the world for that matter) it is also the single largest employer—accounting for nearly half the workforce.

Even if you ignore the political rhetoric, especially during the general election, rural distress triggered by agriculture is a fact of life. Don’t get me wrong. There has been substantive progress, yet it is clear that Indian agriculture is crying out for a fix.

And, presumably this will be on top of the 125-day agenda of the incoming government—especially given that a round of politically crucial state elections are round the corner in Haryana and Maharashtra, both of which have a huge agrarian economy.

To sum up then:

One, the Indian economy has turned in an outstanding performance in 2023-24. All the more, if you consider the exceptional challenges it faced since 2020. In fact, it is now on a new trajectory with an average growth rate of 7%, compared to 6% previously.

Second, worryingly though, if you looked beneath the hood as it were, there are structural challenges facing the Indian economy with respect to its agriculture as well as the nature of investment, which at present is dominated by the government. They need to be resolved.

Indeed, the cup is half-full.

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Recommended Viewing/Reading

Sharing the latest post of Capital Calculus on StratNews Global.

In the run-up to tomorrow, when the results of this general election will be declared, the Sensex topped a record high of 76,000. However, this was preceded and followed by considerable volatility in the Sensex, reflecting some uneasiness among investors.

The big question is whether this nervousness pertains to the verdict? Or is it a manifestation of global concerns, especially given the deteriorating situation in West Asia?

To answer this and more, StratNews Global, spoke to Gaurav Dua, Head, Capital Markets Strategy, Sharekhan.

Sharing the link below. Do watch and share your thoughts.

I am also sharing my latest column in The Economic Times. It is a trend—influence of women voters, a hitherto neglected cohort—you should watch for while tracking counting of votes tomorrow.

Sharing the screen grab below and the link above.

Till we meet again next week, stay safe.

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Thank You!

Finally, a big shoutout to Gautam, Premasundaran and Monica for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin. 

Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.

Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.