With medium-term growth expected to average 6.8 per cent, India has a huge economic opportunity.The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures.
Cyclical upturns and downturns aside, India now has an established track record of high growth. In the decade leading up to the Covid-19 pandemic, our average annual GDP growth was 6.6 per cent compared with 6.3 per cent in the preceding decade. Of course, there have been times when India grew close to 8 per cent per year, most notably between fiscals 2004 and 2008. But these were episodes of “growth sprint”.
In fiscal 2023, India is seen growing at 7 per cent, making it the fastest-growing large economy. We have come out of the pandemic reasonably well. But there is a drag in the air — from the imminent global slowdown and the full manifestation of the lagged impact of interest rate hikes since May 2022. Consequently, CRISIL expects India to decelerate and grow at 6 per cent in fiscal 2024. So, can India run a “growth marathon” like China and some East Asian tigers?
Growth accounting provides a useful framework to analyse medium-term prospects by decomposing their drivers into the contribution of capital, labour and efficiency. We expect the Indian economy to grow at 6.8 per cent per year for the next five years with 52 per cent of it from capital, 38 per cent from efficiency and 10 per cent from labour. Capital will be the key and stars are aligning for a sustainable lift in the private sector investment cycle. Investment as a percentage of GDP has already touched a decadal high of 34 per cent in fiscal 2023. So far, the onus to lift the investment ratio has been shouldered by the government. The growth model is changing to an infrastructure and manufacturing-driven one.
The Union Budget has raised capital spending by almost a third in high-multiplier infrastructure segments. But such support to capex will moderate in the years to come, given fiscal consolidation pressures. The contribution of the private sector to investments is set to improve, primed as it is with healthier balance sheets, cash reserves and low leverage.
So what is holding back a swift and broad-based lift in private investments? Economic uncertainty, primarily, and geopolitical events to a lesser extent — even though some corporates have pencilled in higher capex for fiscal 2024. What has quickened the pace of private investments in select segments is the Production Linked Incentive (PLI) scheme drawn up for 15 manufacturing sectors, especially in electronics and pharmaceuticals, with ACC batteries and speciality chemicals in the pipeline. Raising the competitiveness of manufacturing is crucial to the broad-based resilience of exports. As for corporate performance, our latest study of nearly 750 companies shows revenue growth is expected to touch double digits in fiscal 2024 despite a global slowdown and interest rate hikes, and a high-base effect of 16-18 per cent is expected in fiscal 2023.
While all that happens, another challenge looms for the manufacturing sector — sustainability. Typically, manufacturing and infrastructure growth are carbon-intensive, so it’s important to have a significant and simultaneous focus on green transition. Having a high sustainability quotient can only embellish India’s credentials as a production destination. Our research informs us that between fiscals 2023 and 2027, over 15 per cent of India’s capex could be towards green initiatives involving renewable energy, transportation, altering the fuel mix, and green hydrogen. In the fragmented geopolitical milieu, which is shifting towards supply-chain diversification and friend shoring, India can attract foreign investments.
The creation of physical and digital infrastructure in conjunction with efficiency-enhancing reforms will raise the contribution of productivity to growth. The economy is expected to continue seeing efficiency gains from reforms such as GST and Insolvency and Bankruptcy Code (IBC).
Labour’s contribution to growth is likely to be low not because India does not have sufficient people in the working-age group: This cohort is 67 per cent of the population and is set to expand by 100 million over the next decade. It is the quality and skilling of the workforce that is holding it back. Finally, the falling labour force participation of women will have to be reversed through employment policies and investing in the health and education of women. According to a World Bank report in 2018, India could add 1.5 percentage points to its GDP growth by improving the participation of women in its workforce.
Given current growth dynamics, India should become a $5 trillion economy by fiscal 2029. Down the road, the impact of climate risk mitigation will be felt across revenue, commodity prices, export markets and capital spending. At present, there is a significant sense of optimism around India. And the starting gun for the “growth marathon” has been fired. To win the race, our focus must be sharp on the drivers of pace.
The writer is managing director and CEO of CRISIL Ltd
Published at © The Indian Express (P) Ltd
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