A deeper understanding of the sources of the growth surge over the past 5 years is important. GDP growth had moved up from an average 5.2% during FY98-2004 to 8.9% in FY04-08. This has widely been attributed to investment increasing from 25% of GDP in FY98 to 39% in FY08 (financed by domestic savings). Also cited is a fall in the share of household consumption in GDP from 70% in FY2000 to under 60% in FY09. However, this inference of an investment-driven growth is only partially correct. Much of the increase in our domestic savings was the result of a very steep increase in corporate and government savings; household savings rates have remained relatively flat. In other words, households have not significantly diverted their incomes from consumption to savings.
Capacity creation decisions, moreover, are not made in a vacuum, they are born of demand for goods and services. Consumption has not only been a growth driver, it has also buffered growth from cyclical volatility in the investment cycle over the past decade. In addition, India?s production remains more oriented towards domestic markets than exports, compared to most of its emerging market peers. This has unarguably insulated India to a larger extent from the global economic turmoil. Going forward, how do we see these impulses playing out?
First, India?s savings and investment rates are close to levels achieved by China and other Asian developing economies, conceivably at their potential peaks. India?s domestic savings rates are consequently likely to taper off over the next few years. Growth and consumption will thereafter become a self-reinforcing virtuous cycle.
Second, we are in the midst of a series of structural changes which will drive consumption. India?s consumption penetration rates are among the lowest in the world. Be it insurance, banking, housing, credit cards, consumer durables, modern retail or logistics services, India?s per capita consumption levels offer significant opportunities for growth. Expanding social security nets through pension and insurance schemes are also likely to increase consumption, with falling life cycle uncertainty. A major impetus is likely to be enhanced access to markets through ongoing improvements in logistics. Third, there is an intrinsic push towards urbanisation. By 2025, McKinsey estimates that 62% of India?s consumption will be in urban areas. Concentration of purchasing power creates economies of scale, thereby reducing delivery and marketing costs.
This will lower prices in real terms, consequently increasing purchasing power. India?s young population and increasing middle class will only magnify this effect.
Fourth, the significant role of banks and other financial intermediaries in this transformational shift over the last half a decade will only increase in future. The share of retail in incremental lending has expanded from 4% in 2005 to about 13% in 2008. Even then, India?s share of retail bank loans in GDP is less than 10%, compared to around 40% in Malaysia and Korea and close to 60% in Taiwan. Apart from direct retail financing, higher working capital credit delivery will increase operational efficiency in supply chains, allowing cost savings to be passed on to consumers. Non-bank intermediaries, too, have been playing an increasingly active role in delivering consumer credit to Tier 2 and Tier 3 towns.
?The author is MD and CEO, Axis Bank, winner of FE’s best bank award in the new private sector bank category