India's Growth Takes Off
RBI and analysts claim India has discovered a higher growth trend of 7%, implying that the economy will grow faster than previously assumed. EPISODE #156
Dear Reader,
A very Happy Monday to you.
Last week the Reserve Bank of India (RBI) announced it latest monetary policy review. As expected it continued to keep its finger on the pause button with respect to interest rates.
The big surprise was the upside RBI shared with respect to the growth projections for the Indian economy. Despite global and domestic handicaps it argued that India would close the current fiscal with a growth of 7%—50 basis points higher than its forecast of 6.5% earlier this year.
They are not alone in their seemingly unbridled optimism. The economics team of Axis Bank argues that in fact, 7% is the new trend rate of the growth for the Indian economy.
This week I try to unpack the arguments about the hypothesis that India is best is just about to begin. Do read and share your feedback.
The cover picture is sourced from Pexels and taken by Lucky Trips.
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Plotting A New Growth Trend
If I am not mistaken it was in 2004 when Vijay Kelkar, the former finance secretary who was serving as the advisor to the then Finance Minister Jaswant Singh, presented a paper at a conference organised by an investment bank in New York. It had an interesting title—India: On the Growth Turnpike.
Kelkar, an astute observer of the Indian economy, argued that country’s economic growth was on the turnpike—a North American term for an expressway.
He told the audience:
“I propose to present logic and evidence which suggests that economic growth in India will considerably accelerate further in the coming decade.”
There were few takers in the room back then. Facts spoke otherwise though. Indeed, Kelkar turned out to be prescient.
The Indian economy took off thereafter, before it collapsed in a heap in 2008—when the global currency crisis overwhelmed the world. For the rest of the decade the Indian economy struggled.
The big news is that India’s economic outlook is poised for another accelerated phase of growth in the next decade.
Last week the RBI signalled as much in its credit policy statement, when it revised the country’s growth upwards rather dramatically. From 6.5%, it revised the projection to 7%.
Like it did in 2004, the latest claim too seemed incredulous. But like Kelkar argued, it is based on “logic and evidence”.
Addressing the press conference following the presentation of the credit policy review, the RBI in fact defended this revision and claimed that it was being conservative in its projections.
The central bank’s deputy governor, Michael Patra, maintained that high-frequency data confirms that the record growth momentum witnessed in the just released data for Q2 GDP numbers was not a chance outcome.
“If you look at October, November high-frequency data which we use for our nowcast, they are all very robust right now; if you just take October-November data, you will exceed 7%. So, at present, 7% is a conservative estimate”—Michael Patra, Deputy Governor RBI
Preceding this, the day before in fact, an analyst report from Axis Bank chief economist Neelkanth Mishra, claimed that India had discovered 7% as its new trend growth. To borrow Kelkar’s coinage, Neelkanth is arguing that once again India’s economic growth is on the turnpike.
Resilience
A remarkable fact about the Indian economy, as observed by Kelkar two decades ago, is its resilience to shocks, especially after 1980—the year when it initiated a calibrated pivot from socialism to a more market-oriented economy.
Kelkar attributed this to the price flexibility that came with a market-based reform. As a result any shocks worked through the economy by price adjustments. For example a shortfall in production of a commodity or service would lead to a spurt in prices thereby curbing demand; a lower demand would curb a future price rise and eventually the shock would work its way out of the system.
Now this attribute—greater play to market forces—has only increased in the last few decades, especially after sustained privatisation of public sector undertakings, digitisation of the economy and so on. As a result, the ability of the economy to rebound from such unprecedented back-to-back shocks, has only improved.
Both RBI and Neelkanth take note of this resilience.
The governor in his post-credit policy review remarks said:
“The years 2020 to 2023 will perhaps go down in history as a period of ‘Great Volatility’.
India’s GDP growth remains resilient and robust as reflected in our projection of 7% growth in the current year.”
Arguing similarly, Neelkanth said:
“India’s economic growth has surprised positively in the past few quarters despite the presence of local as well as global headwinds: continuing fiscal consolidation, higher domestic interest rates, tightening liquidity conditions, as well as slowing exports of goods and services.”
Inflation
The other remarkable factor that both assessments flagged is that the projected uptick in growth would not unduly stir inflation. Though the economy will have to see out the current elevated level of inflation.
A key factor in my view is that North Block and RBI are on the same page. The former by managing fiscal policy within strict guardrails has allowed RBI greater influence with its monetary policy. Previously, especially between 2008-2012, the two would differ, resulting in economic chaos.
Check out what the RBI governor said last week:
On the inflation front, the summer of 2022 is behind us. We have made significant progress in bringing down inflation. The steady decline in core inflation indicates that monetary policy is working.
Moving forward, inflation management cannot be on auto-pilot. The future path is expected to be clouded by uncertain food prices. CPI data for November is expected to be high.
The MPC will be highly alert to any signs of derailing of the ongoing disinflation process. Based on the evolving situation, the MPC will take appropriate action to reach the 4% target.
Liquidity will be actively managed consistent with Monetary Policy.
Similarly Neelkanth observed:
“We note two CPI inflation trends: Core inflation running at a below-target level on a sequential basis; and headline to be sustained at more than 4%.
Strong growth conditions are likely to support inflation in the near to medium term, while a revival in capex checks core inflation. Hence, policy rates are unlikely to fall in FY24, though effective rates could be impacted by the improving fiscal balance and tight liquidity conditions.”
Clearly, the worst of inflation is behind us. Assuming that there are no untoward shocks of the type we witnessed in the last few years.
Private Capex
So far capex or capital expenditure in the economy has been held up mostly by the union government. Lately, several state governments have joined this spending spree on capex. At the end of October, the growth over the same period last year, was at an astonishing 36.7%.
However, private capex has so far skipped the party as it were. Beginning in 2008, they have gone into a funk. However, both RBI and Neelkanth believe that India Inc has begun to come out of its investment slumber.
The RBI Governor took up from the remarks of his deputy, Patra, to suggest that the private sector capex cycle was starting up:
“Private capital expenditure is also showing signs of revival, particularly in sectors like petroleum, steel, cement and chemicals. Capacity utilisation has now reached a kind of threshold. It is higher than the long-period average at 74%. It has reached a point where we can expect private investment to start picking up.”
…and then added with his characteristic caution:
“Quite a bit of investment is already taking place in private-sector manufacturing companies. For example, the investment in fixed assets by listed private manufacturing companies has registered a growth of 10.5% in the first half of the current financial year and a number of companies.
According to our survey, the manufacturing sector is using internal reserves and surpluses to invest. They are not approaching the bank or they are not resorting to any other kind of borrowing or raising funds.
The high-frequency indicators of investment, such as steel consumption and cement production and very importantly import of capital goods are also showing good growth. All these indicate that the investment cycle should continue.”
Pulling all the above facts together it is clear that two assessments—one official and another private—are concurring that India is poised to launch on a new phase of growth. Like Kelkar said two decades ago: India is on the growth turnpike.
Remember at that time the size of the Indian economy was about $600 billion. Today it is $3.6 trillion. As they say, size matters.
Recommended Viewing/Reading
Sharing the latest post of Capital Calculus on StratNews Global.
Non-cricket sports in India are enjoying unprecedented glory at global podiums. Our athletes are in the medals tally at almost every international event. In fact, we discover a new champion at every event. But, I am not sure whether you are aware that there is a very important footnote to this new found success: Odisha.
The state has over the last decade invested heavily in creating a state-of-the-art infrastructure for non-cricket sports. It is not just hockey—a sport in which they adopted the Indian mens, womens and juniors. Instead it is about badminton, swimming, track and field, kho-kho and so on.
To understand the science and the method behind this success I spoke to Vineel Krishna, Secretary Sports, Odisha government.
Please do watch the illuminating conversation and share your thoughts. Sharing the link below.
Till we meet again next week, stay safe.
Very encouraging signs for the Indian economy. The government has given a boost to growth by policies like make in India and sustained investment in infrastructure development. The record Sensex at over 71k and Nifty above 21k are partly due to foreign investors avoiding China as an investment destination. Inflation is a result of growth but sudden spikes in especially vegetable prices in a country with a huge population, is not a good thing; although these are results of floods, droughts, landslides and other climate change factors. Partly political gamesmanship and hoarding are also sometimes the cause. This government has taken appreciable proactive measures to periodically check the exports of foodgrains and other commodities like onion, to keep the food inflation in check. The free distribution of food items, subsidised cooking gas to BPL families, ever since the Covid period, has also enabled the population at the bottom to keep afloat during tough times. Hence it is but natural that India should be on the turnpike. Interesting and thoughtful article Anil.
While the growth optimism is fine and indeed based on facts, we must remember that we need many more reforms to exorcise the ghosts of Nehru Indira socialist times. Our governance is ineffective and corrupt. We need to weed out corruption and black money from the economy. Growth is just the result of variety of factors. Modi does not have unlimited time and mus TVt hurry up to completely clean the stables before his next term ends. Apart from internal issues, we must manage impact of external geo political events too. Modi now has an extremely competent team of ministers and hence, all depends on Modi how he takes this forward.