India's Growth Surprise
The surprise surge in growth in Q3 may not be an outlier and in fact could be the sign of India launching into a new trend rate of growth. EPISODE #168
Dear Reader,
A very happy Monday to you.
Little over a week ago I snagged an interview with India’s Chief Economic Advisor Anantha Nageswaran on the sidelines of a conference. This was an assignment for NRI Focus, a digital platform for Indian expats.
Coincidentally this conversation took place just a fortnight after the union government released the latest quarter numbers for gross domestic product (GDP). The Q3 growth had come in at a shocking high of 8.4%.
Till my conversation with Anantha I was more inclined to believe that this growth was an aberration. But, from what he told me it is clear that the government was not surprised with the Q3 numbers. And, that the growth for the current fiscal (2023-24) will most likely be revised upwards—closer to 8%.
Are we then looking at a new trend rate of growth for the Indian economy? So, this week I explore India’s growth surprise.
The cover picture is sourced from Unsplash and taken by Joydeep Sensarma. It is a nice segue to the season that is almost upon us: Spring.
Happy reading.
The Q3 Surprise
Little over a fortnight ago the union government released the growth numbers for the third quarter (Q3) ended December of the current fiscal 2023-24. It created a huge stir: Growth for Q3 came in at 8.4%.
This was almost 2% above the 6.64% consensus expectations among analysts. At this level, economic growth would have witnessed a deceleration compared to the 7.6% achieved in the same quarter in 2022-23.
Instead, what we have now is unprecedented acceleration.
A few days later in an interview to ET Now, Reserve Bank of India (RBI) Governor Shaktikanta Das, said that the current momentum of the economy, reflected in the first three quarters, together with high frequency data suggest that GDP growth for 2023-24 would be revised upwards from the present forecast of 7.6%.
“There is a good chance that the GDP growth for the current (fiscal) year (2023-24) can be close to 8%.”
To be sure, RBI has been consistently arguing since last October that the growth numbers are likely to be higher than what was anticipated. In fact, they had formally revised their annual forecast rather sharply for 2023-24 from 6.5% to 7%.
Reality, as we saw in the latest growth numbers, topped even this optimistic projection by the central bank. Clearly, something is afoot in the Indian economy. The growth surprise is no accident.
My conversation with India’s Chief Economic Advisor Anantha Nageswaran (click the link if you wish to read the full transcript) only reconfirms the premise that India has reached a point of inflection in its development trajectory. More importantly Anantha shed light on what could be going on.
Unpacking Growth
The conversation with Anantha revealed the official thinking on the new growth numbers. Will share some of it here, but for the full interview click this link.
Responding to a query whether he was surprised at the Q3 GDP number, Anantha said:
“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.”
Frankly, this sounds very plausible. Especially in a country like India. Blessed with a population of 1.4 billion, it is only just about catching up with the legacy deficits built over the first seven decades since Independence.
Resolution of such structural fault lines when combined with other structural improvements—like the roll out of the Digital Public Infrastructure (DPI)—can morph into a force multiplier that can baffle conventional growth models.
Like the RBI governor, Anantha too was confident that the Q4 number for 2023-24 would be higher than what was anticipated. Consequently, the growth for the full year will top the expected 7.6%.
Lagged Impact
Like I said earlier, there is merit in Anantha’s argument.
Efforts to improve the plumbing of the economy over the last 15 years, beginning with the rollout of Aadhaar and the DPI and then extending to the rollout of structural reforms like IBC, GST and so on were just beginning to manifest when the covid-19 pandemic struck.
The aftermath of the pandemic was devastating for the Indian economy—its growth, you may recall, contracted by a record 23.9% in the first quarter of 2020-21.
This was followed by the fresh shock to global supply chains with the breakout of conflict between Russia and Ukraine. Worse, to tame the spurt in inflation that followed, the US Federal Reserve ramped up domestic interest rates. Three back-to-back economic shocks of this magnitude is unprecedented.
Breaking ranks with most other countries, India came up with a supply side response. This meant shoring up livelihoods (direct cash transfers, free food grains and so on), even while it accelerated the vaccine rollout to protect lives. With the benefit of hindsight it is clear that India succeeded where many countries failed.
I remember Nandan Nilekani, the founding chairman of Aadhaar and co-founder of Infosys Ltd, used to constantly harp about the potential impact of the improved plumbing in the Indian economy that Aadhaar was fostering. His refrain was that once investment revived India would get more bang for the buck—implying the acceleration would be more than normal.
Again, with the benefit of hindsight, he was right. Together with the simultaneous rollout of hard infrastructure like highways, rural roads, airports, ports and so on, provided the perfect backdrop for India to harvest the phygital (physical plus digital) dividends—one of which is growth.
Another expert who read the tea leaves well is Neelkanth Mishra, chief economist of Axis Bank. I had interviewed him for StratNews Global, where he went out on a limb and argued that India was poised to hit a new trend rate of growth: 7%.
The interview took place in January this year, just weeks after RBI surprised everyone by upping their growth projection for 2023-24 from 6.5% to 7%. Back then everyone was taken aback by RBI’s bullishness on growth. Neelkanth was not. He said:
“RBI is projecting this year's growth to be 7% plus.
What we are saying is a bit stronger. Which is that trend growth is 7%, meaning that if we are growing at seven, then there shouldn't be overheating.”
Coincidentally, a member of the RBI’s Monetary Policy Committee recently claimed that India can grow at 8% without overheating—wherein the economy runs into a capacity constraint and demand outstrips supply causing inflation.
If you have the time, I recommend watching Neelkanth’s interview—full of insights that are now bearing out. Sharing the interview below.
In fact, this week I had the chance to interview Chennai-based Arjun Nagarajan, chief economist, Sundaram Asset Management, for StratNews Global (shared below). The focus of the interview was the runaway surge in India’s GDP in Q3.
During the course of the conversation, Arjun shared something that contributes in our understanding of the Q3 growth numbers. I had flagged the latest consumption numbers released by the National Sample Survey Office (NSSO) showing a surge in consumption of non-food items—aspirational goods like consumer durables—in proportion to the decline in spending on food as disposable incomes grew. Check out the graphic below.
This is what Arjun said in response:
“Globally, you see, whenever an economy crosses that $2,000 per capita GDP number somewhere in the in the in the range of $1,800 to $2,200—we crossed that just after COVID—you have seen a very sharp pickup in consumption of durable goods, especially let's say passenger cars, consumption of penetration of two wheelers, washing machines, air coolers, air conditioners. All of these have seen a fair bit of a pickup.
So we are exactly where China was in 2007 and 2009. When China crossed the $2,000 per capita GDP, you saw a very sharp pickup in passenger vehicles. You saw the same thing in South Korea and Indonesia, I think your washing machine penetration went up nearly 2x, your penetration of refrigerators went up 3x.
So, India is not going to be any different.”
In conclusion it is apparent then that the recent growth numbers are not necessarily out of line. It is the new normal. We will have to wait for the Q4 numbers to be sure. Till then, it is safe to assume that India is at a tipping point in its economic history.
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
Over the last few weeks the union government has released a raft of official data. All of them point to an exceptionally good macroeconomic backdrop. For any incumbent government, especially one facing two-term anti-incumbency, this is a blessing indeed.
Hard to reconcile the dramatic improvement in the macroeconomic backdrop in the three years after covid-19 pandemic struck the world. It is almost too good to be true. To examine this I spoke to Chennai-based Arjun Nagarajan, chief economist, Sundaram Asset Management.
Very patiently Arjun explained how the circumstances are indeed very opportune from India. According to him India is exactly at the same spot as China in 2007: with a per capita income of plus $2,000. According to him, this is the tipping point when an economy takes off.
Sharing the link below. Do watch and share your thoughts.
Till we meet again next week, stay safe.
Thank You!
Finally, a big shoutout to Atul, Premasundaran and Ranjini 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😊.
Hi Anil,
Thoroughly insightful as always. Thank you for the link that leads to the interview with Mr. Anantha Nageswaran.
Thank you!