Is a 5% trend GDP growth likely to be the new normal?

By: |
September 23, 2020 6:10 AM

From the response to the pandemic to increased statism, as Ruchir Sharma argues, India is relatively badly placed

That is despite having the advantage of a large domestic consumer catchment which makes it less vulnerable in a de-globalising world.

It is no surprise India doesn’t find a place among the big winners in the post-pandemic era as listed by Morgan Stanley Investment Management’s chief global strategist Ruchir Sharma. Even without the pandemic, India was crawling, having posted a depressing 3.2% year-on-year (y-o-y) growth in the March quarter which dragged down the FY20 number to an embarrassing 4.2%. India comes in at a middling 13 out of 25 largest emerging countries on Sharma’s post-pandemic screen and ranks among the top ten in just one of the four key categories. That is despite having the advantage of a large domestic consumer catchment which makes it less vulnerable in a de-globalising world.

The other plus—India hasn’t lost too much share in global trade—is a small one. The fact is India isn’t on its way to becoming a Vietnam, which probably stands to gain the most from the China-plus-one strategy that many nations are considering. Also, unlike in the post-World War II period when nations exported their way to success, in an era of de-globalisation, that is not possible either. All of which means growth rates of 7% and 8% are going to be very hard to come by. Indeed, in this new environment, Sharma believes that post-March 2022—which is the earliest we can hope to be back at pre-Covid levels—it would be difficult for India to clock in more than 5% on a sustainable basis.

In his matrix, India scores poorly on three key parameters, ranking, for instance, 13th on government competence thanks to the rising corona curve—64 deaths and more than 4,030 cases per million. It does worse on the government-debt and deficits metric, slipping to the bottom half of the EM class, at number 19. As Sharma points out, India went into the pandemic with a high fiscal deficit and public debt and, consequently, expectations of any big stimulus—that could boost growth—need to be tempered.

Again, India does only slightly better at digital sophistication—which includes investment in R&D—coming in at number 16. It is no secret that, at barely 0.5% of GDP, our R&D spends are much lower than those in other EMs where it is 2.5-3%. That then makes it hard to boost productivity.

Already, several years of stagnating investments—primarily in the private sector—and, more recently, decelerating consumption are killing growth; GFCF contracted in the last three-quarters of FY20 and was a negative 47% y-o-y in Q1FY21. Most promoter groups today don’t have the financial muscle to make large investments, with their wealth getting diluted. Sharma is concerned that India today has fewer large companies for foreign investors to invest in as. Also, it is unfortunate that most of the wealth created in the start-ups sector, with its 30-odd unicorns, belongs overseas.

Even more worrying, he says, is the regulatory overkill and the cynicism where the political and social narrative is vilifying the business class. It can’t be a good sign if entrepreneurs want to take capital out of the country. The government would do well to heed these concerns and to ensure a level-playing field across sectors; it also needs to make sure regulation is fair and that companies are not harassed by tax authorities. Sharma also points out a policy of statism and socialism is taking away resources from infrastructure build-outs. That is not the route to success which other East Asian nations took.

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