Our Fastest Growing Major Economy: How?

Numerically, there is no disputing the numbers, just as our economy registered high growth in 2017-18 despite demonetisation. Furthermore, according to most forecasts, including those by the International Monetary Fund, growth will slow down in 2023-24 but will be in the range of 6-6.5%, which will still be higher than all other major economies. Hence, the Indian growth story will be a winner all the way. The strange part of our 7% expected growth in 2022-23 is that our economy will slow down in the second half of the year. If one goes by the Reserve Bank of India (RBI) forecasts, we see a sequential slowing down from 13.5% in Q1 to 6.3% in Q2 and then to 4.6% in Q3 and Q4. The last two quarters will be troubling as growth in 2021-22 was just 5.4% and 4.6%, which should ideally have provided a statistically low base for higher growth this year. But this will not happen, so it is necessary to evaluate what is not right in our economy.

The first issue relates to corporate profitability, which shows how inflation has affected the balance sheet. The Q2 results paint a picture of strong growth in non-financial companies by 25-30%, driven by increased demand. However, almost universally there has been a decline in profits and this is because companies have seen higher increases in input costs which could not be fully passed on. It also means that this pain will continue throughout the year, as inflation will remain high for the next 3-4 months. The solution is to keep working to reduce inflation.

Second, the data show once again that higher inflation (and its mirage of higher consumption) has had a negative impact on savings, which have been under pressure this year. In 2021-22, financial savings declined as per RBI data. The fact that consumption has been stable, good GST collections are being received and the company’s topline is growing is at the cost of savings. This is again the effect of inflation. This is not good news, given that banks are facing the challenge of slower growth in deposits relative to credit. We need to revive savings through suitable tax incentives. The fall in savings also means that we will run a larger current account deficit (CAD), defined as the difference between savings and investment. The deficit could be in the region of 3-3.5% of GDP in 2022-23.

Third, exports have been affected by the recessionary situation in the West. Textiles, engineering, jewellery, chemicals, etc. are some of the sectors that have been sharply hit by the slowdown, as the western combination of low growth and high inflation has put demand under pressure, hurting our exports. While inflation will probably come down in the West next year as well, recession-like conditions will prevail. So exporters need to be prepared for a long lull. We need to think differently and keep a close eye on the composition and destination of our exports.

Fourth, the sluggish West is a red flag for the software industry. We are already seeing layoffs at large tech companies that will be reflected in outsourcing. This is important because both the software flow and remittance support our current account. Our trade deficit will surely widen as import demand remains stagnant with a growth of 7%. Exports will remain low until the world economy recovers. Annual software receipts of more than $120 billion have supported our current account in the past, but slippage here will be difficult to avoid.

Fifth, as India’s finance minister pointed out, the private investment cycle needs to kick-start. The picture so far is that it is concentrated in a few sectors such as steel and telecom, and is not broad-based. A comprehensive recovery is likely to take time.

Sixth, consumption growth could be an inflation-supporting mirage, as many marketers of consumer goods have flagged low rural demand as a concern. Kharif production of rice and pulses will be less this season, which will affect the income of farmers. Therefore, caution should be exercised in interpreting the signals here.

Seventh, the question of employment still hangs in the balance. There is a constant debate on whether it is going up or not. The fact that many new-age firms, especially startups, have gone for layoffs is bad news. Post-Covid, many companies have adopted technology for routine processes. Now, due to the pressure on profits, jobs will be at stake on the domestic front as well. We need more openness in the efficient market place rather than just delivery jobs at the bottom end to sustain consumption.

While we have ambitious goals to integrate into global supply chains, our relative isolation at this time has helped us, as we remain the world’s fastest growing major economy. Once India’s development becomes linked to the fate of other countries, this epithet will not last. Currently, only foreign portfolio and direct investment are vulnerable to externalities, while exports complement growth.

Finally, we must interpret the title ‘best growing economy’ with caution. A lot still needs to be done by the government and the RBI to provide the right policy environment. But the steering wheel will be in the hands of private investment.

These are the personal views of the author.

Madan Sabnavis is Chief Economist, Bank of Baroda and author of ‘Lockdown or Economic Destruction’