Indian Economy 2014-24: Scripting a fairy tale growth story

31 Jan 2024 , 09:14 AM

Unlike other years, there will not be an Economic Survey ahead of the Union Budget 2024, this time around. On February 01, 2024, the Finance Minister will only present an interim budget; to get approval for expenditures and other appropriations till the new government is in place and the full budget can be presented. The Chief Economic Advisor (CEA) has already confirmed that The Economic Survey of FY23-24 will be presented ahead of the full budget, once the new government is in place. However, the Department of Economic Affairs has prepared a detailed report under the stewardship of V Anantha Nageswaran, Chief Economic Advisor (CEA), Government of India. 

What the CEA has done in this 10-year preview is to pencil India’s macroeconomic journey over the last 10 years and extrapolate these trends to the future. Incidentally, the NDA government will complete 10 years in power in May 2024 and this would also, effectively, be a report card on the government performance. More importantly, this report also sets the agenda for the Indian economy to achieve its much touted dream of transforming into a $5 trillion economy in the next 5-6 years.

Three Trends that will define India’s macroeconomic future

The CEA and his team have identified 3 major trends that will have a strong bearing on the way India charts here growth story in the years to come.

1. The first such trend is de-globalization. OK, just to clarify, this does not mean that economies are retracting from their commitment to free trade. However, two things have emerged in recent years. The COVID crisis highlighted how hopelessly the world was dependent on China for industrial inputs. When the shutdown in China caused supply side bottlenecks, countries had no choice but to look at solutions beyond globalization. Also, the spate of geopolitical crises from West Asia to Russia to the Middle East and Taiwan have indicated that global trade is likely to remain vulnerable. As the report aptly puts it, “Countries will look out for opportunities in onshoring and also for friend-shoring.” That is likely to be the paradigm going ahead.

    

2. The second point is related to the first point and is based on the premise that countries will struggle to export their way to growth. That was the paradigm on which the Asian Miracle was built. Countries like Taiwan, South Korea, China, Indonesia, and Japan, literally grew at supernormal rates for decades on the back of exports. The much bigger opportunity for India today is to emerge as a manufacturing hub to the world. With the likes of Apple, Tesla, and Boeing; India is just about scratching the surface. However, that also means, India must work aggressively on reducing its logistics costs and build market share where it has an inherent advantage. Here, India must also underline its natural edge in emerging technologies like AI & ML to magnify its impact.

    

3. The most important trend is about energy transition. As icebergs melt and sea levels rise, the climate crisis is no longer a debate topic for seminars and conferences. It is real and it is impacting the lives of people. From erratic rains to extreme heat to submerging islands, there are going to be innumerable side-effects of the climate crisis. India not only needs to cut the transmission of greenhouse gases, but also ensure that its incremental power capacity veers strongly towards alternate energy sources.

It is on the basis of these 3 trends that the 10-year review report by the CEA has painted a portrait of the future.

India growth story prior to 2014

To be fair, the CEA report has acknowledged some of the positive developments in the Indian economy prior to 2014 (especially after liberalization in 1991). 

• India’s liberalization program, which was set in motion by Dr Manmohan Singh in 1991, saw some drastic changes. Quotas were removed, capacity constraints were done away with and tariffs on domestic and imported goods was sharply reduced. These measures, not only expanded the income levels in India, but also created a pro-business milieu.

   

• The second big change was that private sector companies were given the freedom to expand domestically and globally and this resulted in huge surpluses, which allowed the private sector companies to also participate in capital formation. Private banks, private insurers and privatization of fund management were some of the major enhancements.

   

• Thirdly, the Indian approach to technology changed sharply. Technology was not seen as a stand-alone process, but was accepted as a core part of business. Companies started to invest in technology and this took many forms like computerization, ERP, internet strategy, digital technology, artificial intelligence, machine learning etc. 

While some progress had been achieved by successive governments in terms of ease of business, taxation, and economic climate; there were some big changes post 2014. That is what the report by the CEA largely focuses on. It is about how the last 10 years have set the platform for Indian economy to transform in the next 5-7 years.

What spurred a shift in the last 10 years?

The period after 2008 was not easy for the Indian economy. The global financial crisis had destroyed wealth in the stock markets by more than 60%. This was followed by a period of turmoil. European economies were on the brink by 2010 and by 2012, the liquidity overhang in the system was getting out of control. The Fed decided to embark on tapering the liquidity and that led to a run on the rupee. By 2013, Morgan Stanley had already classified India among the “Fragile Five” economies in the world; the others being Turkey, Brazil, South Africa, and Indonesia. It is in this background that the shift began in 2014.

• Easy liquidity and rapid growth over the years meant that credit had gone overboard in India. NPAs were rising and eventually climbed into double digits forcing the government to provide billions of dollars as capital support to PSU banks. The rise in debt was so intense that between year 2000 and year 2010, the industrial credit to GDP ratio had risen from 58.8% to 113.6%. This ratio was eventually reduced through a mix of recoveries and write-offs, bringing the figure down to 83.8% by 2018. Key measures in this period included the recapitalization of PSU banks, mergers of PSU banks and enacting the Insolvency and Bankruptcy Code 2016. The IBC code has provided a credible framework for creditors and banks to sit down and resolve the debt issues amicably in a structured manner, before eventually submitting to liquidation.

   

• GST and RERA were the two regulatory highlights of the last 10 years. GST (Goods and Services Tax) was launched in July 2017 to subsume most of the indirect taxes under the GST. This included excise duty, sales tax, VAT, inter state taxes, customs etc. Only a few sectors like oil and liquor were left out of the ambit of GST. After initial hiccups, GST collections have stabilized at above Rs1.60 trillion a month, but more importantly it has plugged leakages in revenue and has reduced the cascading effect of indirect taxes. RERA was introduced around the same time to make real estate transactions more transparent and to provide recourse to aggrieved home buyers. This has reduced the use of cash and incentivized more global investors to enter this area. More than 1 lakh projects in India are already RERA registered.

   

• Production linked incentives (PLI) and Make in India or Atma Nirbhar Bharat program were launched with twin objectives. The first objective was to reduce the pressure on imports, and this has already worked wonders in defence. Secondly, the PLI is to enable India to emerge as a global manufacturing hub and also to encourage global companies to make India an export hub. The government has also combined this with an effort to reduce the role of the government in most areas, expect the most mission-critical and high priority zones. To encourage foreign direct investments (FDI), most of the sectors have been opened up for 100% FDI under the automatic route.

   

• Medium, small, and micro enterprises (MSMEs) have been the fulcrum of India’s growth for many years. They have always accounted for more than 40% of exports and a much bigger share of the jobs created. The government has focused on the MSMEs, especially in the aftermath of COVID, to help them stand up to changes like the GST, which favours the organized businesses more. The Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs has been a major boon to address liquidity needs. In addition, the introduction of TREDS to address the issue of delayed payments to MSMEs.

   

• The one thing that would stand out among the various initiatives in the last 10 years is the phenomenal thrust on infrastructure. Some of the numbers are absolutely captivating. From capex at 2.8% of GDP in FY14, it has improved to 4.5% of GDP in FY24. Some of the ambitious projects like Bharatmala (road infrastructure), Sagarmala (port infrastructure), UDAN (airport upgradation) have almost redefined the growth of these segments. All these changes have not only had a catalytic impact on growth, but it has also been a magnifying impact, due to the strong externalities that infrastructure offers. 

   

• The big change has also happened in the area of financial inclusion. The mutual fund folios have gone up from 3.9 crore in 16.5 crore between 2014 and 2024. A total of 51.6 crore Jan Dhan bank accounts were opened in this period and that has led to the financialization of savings and the introduction of some innovative payment features like the Unified Payment Interface (UPI).

These are more macro shifts that have happened. There have been massive giveaways to the under privileged from 10.11 crore free gas connections to 2.6 crore pucca houses and facilitating compensation for 6.27 crore hospital admissions. 

But, it was not roses, roses all the way

It must be noted here that the reforms undertaken by the government in the last 10 years had its own share of challenges. Here are the 4 key challenges that were encountered.

• Even though there is a trend towards de-globalization, global trade and investment flows still have a strong imprint on the Indian economy. India’s growth outlook, therefore, is not just a function of its domestic performance but also a reflection of the spillover effects of global developments. Take the Red Sea crisis, which is expected to impact Indian exports by about $30 billion in FY24. The crisis is also likely to bring about imported inflation in the Indian economy. Indian export and import baskets could be vulnerable to such risks in future also. 

   

• Second, there is a very subtle trade-off between energy security, energy transition and economic growth. India needs sources of energy like oil and coal to keep its growth engine churning. However, it also needs to invest in energy transition, so the shift to new energy must happen without impacting the reality of traditional energy. Also, India often finds itself in a quandary on diplomatic issues in energy security. The decision to buy Russian oil did rub the Americans and Europeans the wrong way, just as it had an impact on India’s old trading partners in the Middle East. Also, despite being one of the largest buyers of Russian oil last year, for obvious reasons, Russia opted to stand by China and boycott the G-20 Summit hosted by India. These are delicate balancing acts.

   

• Third, Artificial Intelligence (AI) is a major opportunity, but for a job-driven economy like India, it also poses a major challenge. AI poses some pertinent questions to employment particularly in the services sectors. This was recently highlighted by an IMF paper which estimated that about 40% of global jobs may be deeply vulnerable to the AI impact. However, developing, and growing economies like India must still invest in AI infrastructure and a digitally skilled labour force to harness the full potential of AI.

   

• Last, but not the least, India has an unmatched advantage in terms of the demographic dividend (large young population). However, if the jobs and opportunities do not grow at the same pace, the demographic dividend could actually be counter-productive. 

So, the India growth story surely comes with its challenges too. Ensuring the growth story, despite these challenges, is where the policymakers must chip in.

Post COVID economic resilience – The Big Story

In a sense, COVID was considered to be the turning point that put India on the high growth track. It was not just about the liquidity and macro bounce that happened post COVID. It also highlighted and showcased to the world India’s ability to handle massive shifts and tasks. Handling the COVID crisis deftly was a case in point. But, more important was the way the vaccination program was conceived and administered  on a pan-India basis. If we can describe the post COVID story in one word, it is “Resilience.” What contributed to this resilience?

1. The first is the resilience of the supply side. The share of manufacturing in gross value added (GVA) improved from 17.2% in 2014 to 18.4% in 2018. Of course, subsequent years saw a downturn due to the financial sector crisis and the pandemic. However, for FY24, the share of manufacturing is likely come back closer to 18%. However, the real impact is likely to be felt due to PLI and Atma Nirbhar schemes. Agricultural growth has been robust on the back of remunerative farm prices, while the share of services in GDP has gone up from 51.1% to 54.6%. This has been largely driven by non-contact services after the pandemic and the subsequent bounce in contact-intensive services like hotels, hospitality, tourism, and trade from 2022 onwards.

    

2. The second is the consumption resilience. India has traditionally been an economy that is driven by domestic consumption demand. In the years preceding the pandemic, the private final consumption expenditure (PFCE) as a share of GDP was 58.4%, but has jumped to 60.8% post the pandemic. That has kept the top lines and bottom lines robust for corporate India, even amidst an export slowdown. Growing the GDP to $5 trillion in the next five years is going to unleash a lot of pent-up demand and consumption. That, in itself, is likely to be a catalyst for rapid growth.

    

3. The third is resilience in terms of investment flows. India has been among the largest recipients of FDI (foreign direct investment) in the world, overtaking China along the way. However, there were always the risks that foreign portfolio investments (hot money) could make Indian markets vulnerable. However, domestic AUMs have grown rapidly in the last few years. Today, if FPI assets under custody (AUC) stands at $740 billion, then domestic mutual funds AUM stands at $650 billion and LIC also has an AUM of over $600 billion. That is an effective foil to any global flow disruptions. In addition, retail investor participation has grown in leaps and bounds and that has also created a defence against volatile institutional money flows. The recent inclusion of Indian bonds in global indices would be a force multiplier for flows.

    

4. Perhaps, the biggest item that has contributed to resilience is the focus of the government on structural reforms. This includes drastic changes like the GST, simplification of direct tax rules (for individual and corporates), lower tax rates, monetization of government assets, strong digital public infrastructure, and a major thrust on soft strengths like education and healthcare have made the Indian economy a lot more resilient.

To sum up, the report may look like a lot of patting on the back, but it has highlighted some very important paradigms. The good news is that India has emerged among the 5 highest GDP nations in the world and poised to be in the top-3 by the year 2030. As the French author Victor Hugo wrote many years ago, “No force on earth can stop an idea, whose time has come.” India is such an idea!