Large-scale spending will accelerate despite the lingering effects of Covid-19, and the massive capex programme seems well on target this year
By TV Mohandas Pai & Nisha Holla
Macroeconomic data demonstrates the Indian economy is on an upswing. Investor and industry optimism, combined with government spending, could lend to India recording 8.5-10% nominal growth in FY22—making it the fastest-growing major economy. The IMF and the World Bank place India’s growth targets in this range. Meeting this target could set the economy in a comfortable position to grow to $5 trillion on the way to $10 trillion over the next decade.
GVA estimates for FY22 show that nominal GVA was up 26.8% in Q1FY22 against -20.2% in Q1FY21. The latter, of course, was perpetuated by the effects of Covid-19 and subsequent national lockdowns. The country’s nominal GDP for Q1FY22, while growing a promising 31.7% over Q1FY21, has not recovered fully to be on par with economic trajectory pre-Covid-19. This is partly due to the lockdown impact of the second wave.
Sectoral analysis shows agriculture grew at 11.3% in Q1FY22 over Q1FY21, compared to 5.7% for the previous year. This provides a boost for the sector with the largest workforce component dependent on it (43%). In this period, industry grew at 67.1%, compared to -38.2% last year. India’s major growth driver, services, increased by 17.8% compared to -19% in FY21. Of course, large growth numbers this year seem exaggerated and are due to the prominent dip in FY21, mainly as Q1FY21 felt the immediate effects of the pandemic. A similar analysis of Q2FY22 will draw a better picture of growth.
Under the services sector, the sub-sector consisting of trade, hotels, transport and communication is the laggard. It consists of some of the worst affected sectors by the pandemic—air travel, hospitality and hotels, restaurants and eateries. The sector suffered another upheaval during the second wave and is recovering slowly.
Banking is showing promise. Deposits have grown at 9.3% YoY till September 2021, while credit has grown at 6.7% YoY—these rates are encouraging but anaemic for the targets India must pursue to return to its high-velocity growth. Gross NPAs have decreased from 12% in March 2018 to 8% in March 2021. Strategies that will help stimulate the economy are at play; for example, interest rates have decreased by 1.5-2% since pre-pandemic rates. Similarly, housing loans are at an all-time low of 6.5% from the average of 8.5% since before the pandemic.
Macro indicators, too, are noteworthy. Inflation is reducing; from 5.3% in August, CPI dropped to 4.35% in September. Industry is trending upwards, with the IIP hitting 11.8% in August. Forex reserves are at an all-time high of $640 billion. A record has also registered in FDI ($82 billion in FY21).
The corporate sector, too, is recovering strongly. The debt-to-equity ratio is trending downward for the top-600 non-financial companies—to 0.7 times of peak. Profit growth for Q1FY22 was 51% more than that of Q1FY20. Most companies have paid off debt at, again, a record pace, and corporate lending has reduced. The move to reduce corporate tax to 25% is creating an encouraging upward trend. The industry is talking about increasing capital expenditure to increase capacity. For example, steel production targets are being set for 200-225 million tonnes by 2025 from the current 125 MT.
Indian exports till September 2021 were $198 billion as against $125 billion last year: an increase of 58%. But imports have risen to $276 billion against $151 billion in the same period. Trade deficit went up by $78 billion against $26 billion last year, signifying increasing import demand. Oil prices are also a factor in the increased trade deficit. Forex flows had to be neutralised by RBI by buying and adding to the reserves. Trade deficit will ensure the reserves do not grow as earlier and the liquidity in the banking system doesn’t go to an all-time high again. Currently, the liquidity is Rs 10-11 lakh crore.
Economic growth must translate to increased tax collections; gross tax collections from April-August 2021 are Rs 8.59 lakh crore against Rs 5.04 lakh crore last year (70% increase), with direct and indirect taxes having risen remarkably. Even compared to FY20, tax collections have risen, signifying an uptick in economic growth. Tax collections this year could exceed the budget by Rs 2-3 lakh crore.
The fiscal deficit in April-August FY22 is down to Rs 4.68 lakh crore against Rs 8.7 lakh crore last year. Capex has increased by 28% on account of government spending. The trend of the fiscal deficit will depend on government spending. The government could elect to spend more, resulting in increased overall spending, consumption and development, leading to increased economic growth.
G-Sec rates have gone up despite high liquidity, driven by the anticipation of higher borrowing. But all indications are that government borrowing could be lower than budgeted despite higher expenditure. A worrisome trend continues to be high global oil prices, causing extensive discomfort for massive consumers like the Indian economy.
There are many indicators of growth and acceleration of the economy. Greater optimism is accompanying stock market valuation going up to an all-time high of Rs 260 lakh crore—starkly higher than the current GDP of Rs 210 lakh crore. Indian stock market capitalisation is likely to overtake the UK’s this year to reach the top-4.
This optimism will channel into capex and, hopefully, see increased economic activity. India has witnessed great bursts of reform this year by the government. Large-scale spending will accelerate despite the lingering effects of Covid-19, and the massive capex programme of Rs 5.98 lakh crore is well on target this year.
Pai is chairman, Aarin Capital, and Holla is technology fellow, C-CAMP