Good comeback, now for inclusive growth

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A very important leg of the current revival has been exports; it would be difficult to achieve sustained GDP growth without strong exports.

Morgan Stanley Asia Chief Asia economist Chetan Ahya says there is an inflection in India’s macro environment. Ahya believes increasing capex and improved productivity will lead to growth and create employment opportunities, which in turn will boost incomes and consumption. This virtuous cycle will see the country clock a GDP growth of an average 7% between FY23 and FY26.

That may sound a shade optimistic given the recovery is uneven, crude oil prices are soaring and credit isn’t flowing as freely as it should. But it is not an unreasonable expectation altogether.

Going by the sharp rebound in residential real estate, there is purchasing power waiting to be tapped. Companies are already beginning to commit to capex, steelmakers for instance. It helps that much more if corporate India is not leveraged and there are surpluses that can be put to work in new ventures. CRISIL estimates capex by industry could increase by 30% between FY22-24. While that is undoubtedly useful, manufacturing accounts for just about 15% of GFCF (Gross Fixed Capital Formation). Also, those who are arguing that mechanisation will limit employment opportunities are probably right. Nonetheless, we need to promote high-tech manufacturing, such as in ACC batteries, because that too is important.

If employment is to get a boost, the services sector needs to gets back on track. We are already seeing a revival in the transportation, hospitality, travel and tourism spaces, and as the economy opens up, many of the jobs lost will be coming back. The formal labour market is, in any case, doing pretty well with the IT, BFSI and pharma sectors hiring in big numbers. It is the smaller businesses in the unorganised sector, quite badly hit by the pandemic, that have left millions without work.

The good news is that real estate, a big economy catalyst with a chunky 20%-plus weightage in the GFCF, has seen a stunning rebound. Both the Centre and states need to help sustain the demand with sops like lower stamp duties and bigger tax breaks on home loans. Between real estate and infrastructure, the construction sector can get a leg up. Already, a clutch of infra projects has vastly improved connectivity though roads and railways. This will act as a big kicker for the economy in general, but especially for exports and e-commerce; both are critical pieces of the economy given their potential to create jobs. Indeed, India now has a booming digital economy, funded largely by overseas capital. The e-commerce and start-ups spaces are spread over a range of industries, from food to financial services, from education to hospitality. These firms employ thousands-both blue-collar and white-collar employees-and spend meaningful sums on building and running their businesses.

Pranjul Bhandari, chief economist, India, at HSBC, wrote recently that by increasing the consumption pie, e-commerce alone could add 0.25 ppt to India’s GDP growth annually for the next decade, even if the penetration catches up half-way with China. The economy-wide benefits, Bhandari believes, could be significant “across a pro-entrepreneurship cultural shift, growth, and jobs”. As we have seen, cheap data and internet access has, and will, improve productivity.

A very important leg of the current revival has been exports; it would be difficult to achieve sustained GDP growth without strong exports. For the good run to continue, and not just be a mere blip, New Delhi’s trade policies need to be well thought out, so as to help Indian exporters gain share at a time when many countries are re-evaluating their dependence on international supply chains. High tariffs need to go; over the past few years, tariffs have been raised on 60% of the items imported and the high average customs duty of 17% is hurting. India must reassess whether it needs to be a member of trade blocs like the RCEP. To be sure, several FTAs are being assessed at present, but it is critical we clinch good deals and support exporters by dropping tariffs on parts that they need for their products. India must strive to move into the space vacated by China.

Unfortunately, the economy remains hobbled by limited availability of credit. Banks remain risk-averse, seemingly lending only to individuals and top-quality corporate borrowers. With several NBFCs having gone out of business, the pool of credit-for non-AAA borrowers-is smaller. SFBs and MFIs are no doubt addressing the needs of smaller borrowers, as are fintechs. But they are unlikely to be able to bridge the gap meaningfully, and we need to make sure credit reaches more small enterprises rather than only the top companies. Else, the MSMEs-already battered by the Covid-19 pandemic-will struggle worse. Some of this is reflected in the low consumer confidence measured by RBI’s survey. Since the informal sector is the bigger part of the economy, accounting for 90% of the jobs, it urgently needs to be fixed. The demand from the formal sector, which is doing well now, may push up investments-even if capacity utilisation is just 70%-but only up to a point. Beyond that, if growth is to pick up pace as desired, we need demand from the informal sector to kick in. One hopes the trickle-down effect will play out, to lift the informal sector out of the rut it has fallen into.