India’s Growth Driven by Investment and Efficiency By Investing.com
India’s economy has been on an impressive growth trajectory, with its GDP surging by 7.8% year-on-year in the March quarter, culminating in a robust 8.2% growth for the 2023 fiscal year. This marks one of the highest annual growth rates in the post-global financial crisis era. Despite signs of cooling from previous quarters that exceeded 8% growth, India’s performance is commendable, especially given the sluggish global economic environment. So, what’s fueling this economic dynamism?
The 2023-24 fiscal year has been characterized by substantial investments. Real gross fixed capital formation increased by an impressive 9% over the year. However, there has been a noticeable deceleration from the peak growth of 11.7% in the September 2023 quarter to 6.5% in the pre-election quarter. Private consumption growth, on the other hand, has maintained a steady pace of around 4% in recent quarters. This investment surge, though slowing, is supported by some crucial factors.
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One significant aspect of this investment boom is the restrained use of leverage. Broad money growth has been kept to a moderate 11%, which helps control nominal GDP growth. Private sector leverage remains stable at 90-92% of GDP, with non-financial corporations accounting for just 55%. While retail bank credit growth is high, overall commercial bank credit has grown at a moderate 15-16% year-on-year through the March quarter. This careful financial management means that the investment boom hasn’t led to overheating or significant inflationary pressures.
Producer price inflation has remained low, indicating weak pricing power. This stability suggests that there won’t be large downward revisions in real GDP due to hidden inflation. For consumers, the inflation rate, measured by the consumer deflator, slowed to 5.3% in the March quarter and is expected to settle close to 4% this year.
India is also witnessing a significant upgrade in efficiency, thanks to advancements in IT and earlier reforms. These changes have streamlined processes like payments, logistics, retail distribution, and tax handling. This increased efficiency is helping to release more measured GDP in real terms. If the current government retains power, further reforms could enhance this trend, indicating that India’s potential or trend growth might be higher than previously estimated.
Another positive factor is the minimal current account deficit, which is just under 1% of GDP. Unlike past periods where rising leverage led to imbalances and overcapacity, the current balanced growth trend is reminiscent of the mid-2000s. This stable external position provides better support for the rupee and reduces the risks associated with a large external deficit.
In conclusion, India’s recent growth spurt is underpinned by strong investments, controlled leverage, and efficiency gains, all within a stable external environment. This suggests a more sustainable growth path moving forward, reflecting a higher potential growth rate than commonly perceived. This analysis is based on the insights provided by UBS.
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