Praveen Jagwani CFA
Despite a promising start, the year 2019 posed numerous challenges for Indian economy. The GDP growth rate declined from nearly 7% to 5%, the Industrial Production index tumbled, consumer confidence worsened and Unemployment grew. Seemingly Prime Minister Modi was not able to anoint the country with the Midas touch that characterized his first term. India seemed to be teetering under a slew of seismic reforms, in rapid succession. There was insufficient evidence in the near term that the reforms were improving the quality of life for the vast majority of Indians. But that did not stop PM Modi from proclaiming his ambition to make India, a USD 5 Trillion economy by 2025.
It is an audacious goal but not out of reach, given that the GDP is just a shade under USD 3 Trillion at present. Also, this is not the first time that India has slowed down to below trend metrics. In the past two decades, there have been many quarters of disappointing growth, causing the popular narrative to turn pessimistic. However quite predictably, as a young resilient nation, India inevitably snaps back and finds its growth rhythm. GDP growth dipped to 5% in 2009, 2012 and 2013, and then recovered within a few quarters. The longer-term growth momentum of India remains intact. The cyclical pattern is emblematic of an emerging economy with deep inherent vitality. Thus, we are not overly concerned about the recent spate of negative economic news.
The Near Term
India, like most emerging countries has had its fair share of scandals, frauds, wars and sectarian strife.Yet, through successive Governments and varying leadership, in the past 3 decades, the country has grown at an average rate of 6%. Since 2014, under the Modi Government, India has embarked on an accelerated trajectory of development. Evidently, in a diverse & complex country like India, not all people are able to cope with such transformational changes leading to anxiety along social/religious/economic fault lines. While short term solutions to the challenges enhance political capital, structural reforms create growth potential. The Modi Government has focused more on the structural transformation of the country and perhaps it is time to ring up a few tactical victories as well. The immediate primary concern for India is a slowdown in both, Consumption and Investment. In the past few months, the Government has acknowledged the magnitude of the problems and taken the following steps to engineer the Investment cycle and to boost Consumption:
|Investment measures||Consumption measures|
The fiscal stimulus outlined by the Modi government is a very welcome move even though it annoys those who would prefer to see a containment of the fiscal deficit. In a scenario where the private sector is not stepping up to the plate to create capital and jobs, someone has to. That someone is the Government and in our view, India’s historic growth momentum can easily endure a slightly wider fiscal deficit. Luckily the Fiscal policy is now in lockstep with the monetary policy. The Reserve Bank of India, enthused by a persistently low inflation, reduced the repo rate by 1.35% during the past year. This has helped immensely in injecting the much needed liquidity in the system. But the transmission of the rate cuts to end consumers still remains weak because the banking system has been slow to transfer the benefit of lower rates to borrowers.
Coming into 2020, there are already some clear signs that a recovery is on the cards, the sustainability of which will only be evident in the coming quarters:
- Healthy growth in air passenger data in Nov’19.
- Growth in petroleum consumption in Nov’19.
- 6% growth in GST collection in Nov 2019 after two months of decline in collections.
- For the first time, more than 8 million businesses filed GST returns in Dec’19 (total businesses registered for GST are approx. 12.2 million).
- Current Account Deficit expected to be sharply lower at 1% for the financial year 2019-20 as against the range of 2%-3% for the past few years.
- The Composite PMI (Manufacturing & Services) rose to a seven-month high of 53.7 in Dec’19 from 52.7 in the prior month. In addition, new export orders were up for the 26th month in a row.
- Water Reservoir levels are 37% above long period average, indicative of adequate water security for agriculture in 2020.
- Foreign Exchange Reserves at an all-time high of USD 457 Billion.
Thus, our view is that growth has bottomed out in the Oct-Dec quarter of 2019 and we should now see GDP accelerate to approx. 6% during the Financial Year 2020-21. The twin impact of Monetary Easing and Fiscal Stimulus is bound to deliver a favourable outcome. A key ingredient of this revival will be availability of credit. The upward mobility of India’s enormous middle class will depend upon credit driven consumption. A steady expansion of mortgages, auto loans and SME finance is needed at this stage. Household credit as a percentage of GDP has languished in India, as against global averages. In 2010, household credit in India was half of the EM average and now it is less than a third. Banks in India have already started reducing lending rates in the past two quarters and we are optimistic about the credit growth in 2020.
The Medium Term
The medium-term growth drivers of India remain intact despite the recent upheavals. The country has enjoyed political stability for decades and has built framework of regulation and institutions for stable governance. The NBFC crisis, trade wars and contentious citizenship bills will have short term impact. These events characterize an evolving liberal democracy and lack the power to fundamentally alter India’s growth drivers. The rising consumption power of an urbanizing middle class is structurally irreversible. More than 60% of India’s GDP comes from domestic consumption. The low dependence on exports provides a degree of insulation to India, from a slowing world order. The economic liberalization and deregulation by way of recent reforms have built a favourable framework for growth that will be felt over the next decade. With improving education, healthcare and financial inclusion, India’s nominal GDP is slated to eclipse that of Germany by 2024. On Purchasing Power Parity (PPP) basis, India’s economy is expected to exceed that of United States by 2030, according to research report issued by Standard Chartered Bank. Thus, India’s medium-term growth trajectory remains robust despite the typical challenges for an Emerging Market.
The UN Population Fund (UNFPA) pointed out in a recent report that India will continue to add to its Working Age Population (between 15 – 59 Years) for the next three decades. It noted that 30 per cent of India’s population is below 14 years of age, with the working age population (15-59 years) constituting another 62 per cent. Only 8 per cent of its people are 60 years or older. The demographic dividend of being a youthful country will be available until 2050-55, longer than any other country in the world. This large pool of potential consumers is India’s hedge against an aging global population and a slowing global economy. According to the latest Human Development Report by United Nations (UNDP), India lifted 271 million people out of poverty during 2005-16. The Human Development Index (HDI) is a summary measure for assessing long-term progress in three basic dimensions of human development:
▪ Long and healthy life
▪ Access to knowledge
▪ Decent standard of living
India’s HDI value for 2018 is 0.647, which puts the country in the medium human development category. India’s 2018 HDI is above the average of 0.634 for countries in this category and above the average of 0.642 for countries in South Asia. Between 1990 and 2018, India’s HDI value increased from 0.431 to 0.647, an increase of 50%.
Literacy rates in India have been steadily rising to reach 74% but the female literacy rate is rising at a slower pace and is only around 65%. Many studies have concluded that female education has a significant impact on the development of future generations as mothers usually have a more direct role to play in the child’s education. As per the 2011 census, over 80 percent of the country’s young female population (aged 7 to 29) is literate; a figure which drops below 30 percent for women aged 60 and above.
There is considerable evidence that suggests that the female literacy rate has climbed more sharply in the past decade with proliferation of internet, smart phones and better facilities at rural schools. The gender parity index indicates the increasing trend of female participation at all levels. At the elementary level, it increased from .98 to 1.05 from 2009-10 to 2015-16. PM Modi’s campaign to eliminate open defecation resulted in the construction of over 100 million toilets in the country including a vast number of those in rural schools. As per the UNDP report on India, paradoxically the Expected years of schooling for girls is now 12.9 years as against 11.9 for boys although because of higher dropout rates for girls, the Mean years of schooling for girls is actually lower than that for boys
Post the adoption of the Sustainable Development Goals (SDG) of United Nations for 2030, India launched the SDG India Index in 2018, in collaboration with Global Green Growth Institute and United Nations. The report ranks each state of India on their performance on social, economic and environmental parameters. As per the 2019 report, the southern state of Kerala retained its rank as the top state with a score of 70. A score of 100 would mean the state has achieved the SDG goals, which are to be met by 2030. Himachal Pradesh took the second spot, while Andhra Pradesh, Tamil Nadu and Telangana shared the third spot. The score is computed based on performance across several parameters, including the quality of education, gender equality, zero-hunger, climate action and reduction in inequalities. The report showed that India’s composite score improved from 57 in 2018 to 60 in 2019 with major success in water and sanitation, industry and innovation. However, nutrition and gender continued to be problem areas for India, requiring a more focussed approach from the government.
The Climate Change Performance Index (CCPI) tracks countries’ efforts to combat climate change. It is an independent monitoring tool managed by Germanwatch, the New Climate Institute and the Climate Action Network. CCPI currently evaluates and compares the climate protection performance of 57 countries and of the European Union (EU), which are together responsible for more than 90% of global greenhouse gas (GHG) emissions. The CCPI assesses each country’s performance in four categories: Green House Gases Emissions (40% of the overall ranking), Renewable Energy (20%), Energy Use (20%) and Climate Policy (20%). India’s rank has shown consistent improvement with the most notable growth coming from focus on Renewable energy.
India’s installed renewable energy generation capacity touched around 86GW in November 2019 and is all set to cross the 100GW capacity mark this year. This includes solar, wind, small hydro, biomass, waste to energy and others. Globally India ranks fifth for overall installed renewable energy capacity, fourth for wind power and fifth for solar power. The Government’s next target is to install 175GW of clean energy by 2022. However, with rapid increase in Urbanization over the coming decades, there could be an upside risk to the aggregate GHG emissions.
As per the latest World Bank’s Ease of Doing Business Report (EDBR), India is ranked 63rd among 190 countries, improving by 14 ranks since 2019. India has improved its rank in 7 out of 10 indicators and has moved closer to international best practices. The 2020 edition of the World Bank’s EDBR acknowledges India as one of the top 10 improvers, third time in a row, with an improvement of 67 ranks in 3 years. It is also the highest jump by any large country since 2011. With the `Startup India Initiative’ reaching new heights, India is also now a global leader in Innovation. India ranked 52nd in the Global Innovation Index. The World Bank’s 2017 Global Findex Database shows that nearly 80 percent of Indian people had a bank account up from 53 percent in 2014.
India, the world’s largest democracy, is an Emerging Market with multiple languages, cultures and socio-economic strata. For a country of such scale and complexity, the glide-path for sustainable and inclusive growth cannot be smooth or linear. The developed economies are struggling with rising inequality, aging population and declining productivity. The agitations in Hong Kong, France and Chile are symptoms of that simmering discontent. India too has shades of similar issues but given its demographics and socio-economic history, it is better equipped to navigate the turbulence. It remains in the zone where Per Capita income will continue to expand and raise the standard of living for years to come. Intermittent periods of economic volatility are a market reality but India has repeatedly demonstrated an intrinsic ability for resurgence. The fundamental drivers of persistent growth remain intact and by all estimates India’s GDP is likely to grow by 7%-7.5% on average for the coming decade.