On the Cusp of a Sustained Economic Revival - Q India Insights By Arvind Chari, CIO- Quantum Advisors

The relevance of GDP growth as the only key measure of a country’s development has long been challenged. The threats from climate change and the social impact from COVID should make it clear that a single-minded quest to target GDP growth can no longer be any nation’s priority.

We do know from the way the GDP statistic is computed that it leaves out a lot of activities which matter to the daily lives of its citizens – for e.g - clean air, quality of health and education, income and social justice and the measurements have also not kept pace with the technological changes.

India has had another problem – the quality and relevance of the current GDP series. At Quantum, puzzled by the high GDP readings between 2016-2019, despite other indicators showing otherwise, we began indicating to our research teams and to external investors that the Indian real GDP number is over-estimated and is no longer a relevant measure to gauge economic activity.

However, when we look at potential growth and forecast long-term asset price expectations, we need the GDP forecast to base our long-term decisions.

We have long believed India’s real GDP growth potential to be 6.0%-6.5%. On a nominal basis, this leads to a consistent double-digit growth – which is the key driver of business and asset returns. This potential growth also solves India’s long-term macro challenges arising from high debt/gdp, young population and the need to move people out of poverty.

The Pre COVID economic slump and the post COVID feeble response by the government led us to worry that India’s near term potential GDP growth may have slipped below 6.0%.  

The recovery from COVID though has improved the sentiments and expectations. In this piece, we look at a few other long-term macro trends which should act as a tailwind to the economic recovery underway.

1. Governments embracing fiscal expansion has increased growth expectations. Even India shed its fiscal conservatism to try and boost growth over the medium term (page 4).
2. India’s twin balance sheet problem, of over-leveraged Corporates and stressed Banks, seems to be mending its way into shape. (page 5)
3. Global growth and government sops towards self-sufficiency is leading to some spurts in the manufacturing and goods exports. (page 7,8)
4. Residential housing which has the higher multiplier to growth is seeing the benefits of increased demand from low interest rates and improving affordability, leading to falling inventory levels.(page 8, 9)
5. India is also a beneficiary of global money seeking destinations to diversify its China exposure.  India is the only large market which can absorb global capital across Equity, Fixed Income, Real Estate, and Infrastructure.(page 9)

Global emerging market (GEM) funds now have their highest ever allocation in a decade to India’s public equities. India’s technology start-ups are turning Unicorns by the day. These capital flows that we are seeing is a testament to the opportunity, the size, and the potential of the Indian markets.  This capital availability will only increase given that despite the recent inflows, global investors remain under invested in India.

Of course, India has its risks. We see inflation and oil prices as the most important short-term risk. However, India has grown historically with high inflation and high interest rates.

The bigger long-term risk remains of India creating jobs for its young population. It is even more imperative now, given that household incomes and small businesses have remained under stress and are yet to recover.  

This is even more the reason for Indian policy makers to have a single-minded focus to maintain and improve India’s growth.  

Be it the Congress or the BJP governments, we are yet to see action on blueprints to necessitate the long term sustained growth.

India is not China. The non-enactment of the new labour code and the recent repeal of the farm sector laws (in what we believed were good reforms for long term productivity increases), holds a key lesson. In the Indian democratic system, policy reforms require consensus. It does not matter that the ruling party has a strong mandate in the parliament to pass laws. It needs to build consensus on tricky issues across party lines to get real change.

As the Annexure on Page 11 shows India’s has continued to grow despite and in spite of its political system. With some pragmatic policy making, given the near-term tailwinds, India can try and accelerate that growth.