Over the last 30 years, the US economy has been home to capitalism and has created a thriving infrastructure for entrepreneurship and growth. In contrast, although India has been known as a growth market with a robust 6-8 percent average GDP growth, over the last decade, it has been plagued with multiple issues resulting from a currency crisis, increased inflation in the first half (of the previous decade) and a high NPA banking system, which has resulted in corporate profitability to GDP at a cyclical low of 3.7 percent as against 7.9 percent in 2007.
So why now should one look at India with optimism?
If one were to look at history, China saw an inflection in per capital income towards 2005, when manufacturing as a percent of GDP started moving up from 24 percent in early 2000 to close to 38 percent towards 2007. The last few years have seen a concerted push in moving India towards a manufacturing hub and it shows in the numbers, where manufacturing contributes close to 18 percent of the GDP today. The per capita income in the country will increase significantly as this number moves closer to 25 percent over the next few years. This will come along with an increased rate of labour productivity and wage inflation which will benefit the domestic consumer economy. There are early signs of multiple industries benefitting from some of the government schemes, starting with chemical, pharma & API manufacturing, auto ancillaries and electronics.
Interest rates of an economy continue to drive capital allocation decisions, both at the corporate and retail level. India is currently going through an interest rate regime, not seen in the last 30 years and this puts pressure on the retail savings pattern, which currently is predominantly in fixed deposits (at 66 percent of the total GDP in the country). The multiplier effect of the absolute growth in GDP (resulting in per capita income increase) and an increase in the allocation of savings towards capital market instruments will lead to domestic driven economic revival in the country, considering we are coming out of a low base in corporate profitability.
The share of unorganized sector contribution to our GDP stands at 51 percent. Though this has come down from 64 percent over the last 8 years, there is significant scope for this to reduce in the coming decade. The formalization of the economy through GST, e-way billing and Fastag issuances along with an increase in the financialization of the rural economy would all go a long way to ensure the share of the organized sector to our GDP increases, thus increasing the labour productivity in the process.
While much of this could have been said 2 years ago too, there are 2 factors that have benefitted the early trend in India emerging strong into the next decade. The government has been a lot more proactive with a focus on spending and potentially expanding its balance sheet. The current account deficit as a percent of GDP is at its strongest in the last decade, which has helped the government’s cause. Moreover, the foreign exchange reserves of the government is currently at 22 percent of the GDP, which is again at its highest ever in the last 10 years. Currently, we are facing a situation of low-interest rates, weak corporate profitability (coming of a low base) and a strong government balance sheet which has the ingredients to see a strong 8 percent growth compounded over the next 5 years.
Secondly, the global supply chain across multiple industries have been affected, and the global brands are looking at India as a manufacturing hub to offset the disruptions that have hit them on the supply side over the last one year. It is a rare event in history for both the macro and micro to align together and it does look like we are in one such event for India as an economy – when all the stars align, it requires poor execution to not take advantage of an opportunity and not reap the benefits of it. We are in the early stages of such a transition and it is exciting to see our economy unfold over the next 5 years, laying the base for the next decade of growth in India.
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