Do it yourself

The Indian economy has indubitably shown brilliant resilience and sustained the base growth rate of ~6%. In the current year FY26 also the real GDP is expected to grow in the range of 6.3% to 6.6% (vs 6.5% in FY25).

It is expected that the tax incentive offered in the budget for FY26 may support urban consumption demand, that has been lagging for the past couple of years, while the rural demand has shown some pick-up. Good monsoon may further stimulate rural demand. Benign inflation and below potential growth trajectory shall keep the RBI on the monetary easing path. Rates may fall further and liquidity may remain supportive. Continued focus on capacity building by the government may however continue to remain the mainstay of the growth.

The global environment remains challenging with trade related uncertainties and geopolitical tensions persisting. However, a resolution of trade and geopolitical conflicts could provide strong impetus.

In my view, 6% (+/- 50bps) may now be the base growth rate (or the new Hindu rate of growth, if you like) for the Indian economy. If India can manage to meet the basic needs (food, clothing, shelter, water, electricity, sanitation, basic education, and primary health) of its 1.4 billion population, our economy might keep growing at this rate for the next decade or so, at least. However, this base rate of growth may not be sufficient to lift the Indian economy to the middle income category like China, Brazil, South Korea, Malaysia, Indonesia, etc.

We urgently need catalysts that may provide the necessary escape velocity to catapult the India economy into a higher growth orbit. Unfortunately, the current growth paradigm lacks those catalysts.

To make my point clear, I would like to highlight the following three inadequacies of India's current growth paradigm.

Declining trend of global integration

The Indian economy has failed to maintain the pace of globalization. The share of India in global trade has remained marginal. In the past 11 years, our exports, as a percentage of GDP, have declined ~14% from 25.2% of GDP in FY14 to 21.6% of GDP in FY25. Similarly, imports have also declined from 27% of GDP in FY14 to 22.5% of GDP in FY25.

India’s exports have grown at a CAGR of 4.64% during FY15-FY25, while imports have grown at a CAGR of 4.36% during this period. The real GDP in this period has grown at a CAGR of 6.09%.

Even worse, the merchandise exports (mostly manufactured goods) have grown at a meager CAGR of 2.54% in the past 11 years. The share of merchandise export, as a percentage of GDP, has contracted 28.6% since FY14. Manufacturing GVA in FY25 was at all time low. Obviously, the government strategy of incentivizing manufacturing and boosting exports is not yielding good results, and may need a comprehensive overhaul.

 

Rate of investment remains low

The rate of investment in the Indian economy has shown some pick up in the post covid period, but it still remains much below the rate seen during 2004-2013 period. Gross Fixed Capital Formation (Investments) have grown at a CAGR of 6.41% (vs Real GDP CAGR of 6.09%) during FY15-FY25. Obviously, this rate of growth in investments is not adequate to gain escape velocity.

The corporate capex growth has also slowed down to just 8% in FY25, after two years of higher growth (27% in FY23 and 20% in FY24)

Consumption not growing

The share of private consumption in the GDP has remained stagnant around ~56 over the past 15 years (except during Covid years). In the past 11 years (FY15 to FY25) it has grown at a CAGR of 6.06%, less than the real GDP growth CAGR of 6.09%. Interestingly, in this period taxes on goods and services have increased at a CAGR of 6.41%.

Government consumption has also slowed down in this period from 10% of GDP in FY14 to 9.1% of GDP in FY25. Overall, government consumption has grown at a slower CAGR of 5.18% during FY15-FY25.

Notably, NSO second advance estimates of FY25 GDP has projected private consumption growth at 10% in 4QFY25 vs the actual 6%. For the full year private consumption growth of 7.2% was also marginally lower than the NSO forecast of 7.6%.

So, if none of the engines of growth – exports, consumption and investments – is showing signs of acceleration, achieving a higher target may not be possible; even though we may just draw comfort from the fact that base growth rate is now higher s compared to 1950-1990 period.

Next week – Growth statistics – the disconnect

Also read

The state of the Indian economy

The Indian economy – glass half full

Recently the Ministry of Statistics and Program Implementation, Government of India, released the results of the Forward-Looking Survey on Private Sector CAPEX Investment Intentions, providing valuable insights into 3 year trends and future outlook private corporate sector capital expenditure plans.

The good

·        The average Gross Fixed Assets (GFA) per enterprise in the private corporate sector increased from Rs. 3,151.9 crore in 2021–22 to Rs. 4,183.3 crore in 2023–24, reflecting a healthy growth of 32.7% over the two years. This implies an average capital expenditure of Rs 366cr per corporate during FY22 to FY24. The estimated provisional capital expenditure per enterprise for purchasing new assets in the year 2024–25 is Rs. 172.2 crore.

·         Overall aggregate capital expenditure of the private corporate sector increased 66.3% over the four-year period from 2021-22 to 2024-25.

The bad

·         Out of the total capital expenditure provisionally incurred in the year 2024-25, only 53.1% were utilized for purchasing machinery & equipment.

·         The strategy of investing in distressed assets and non-performing loans was adopted by less than 0.5% of enterprises. 

·         Only about half of the capex in FY25 is for capacity addition. Over 30% capex is for maintenance, upgrade etc.

The ugly

·         Intended capex for FY26 is about 25% lower as compared to FY25.

·         Capex in the manufacturing sector is ~44% of the total capex committed in FY25. Services (telecom, IT Services, transportation, storage etc.) account for the rest 56% of the capex. Consequently, the employment intensity of the capex remains poor.

As highlighted in the latest Annual Survey of Industries, total employment in the manufacturing sector grew just at a CAGR of 3.2% during the five-year period from FY19-FY23 (see here). Lower capex and even lower manufacturing capex does not augur well for the growth of employment opportunities.

The latest GDP data released by the government has evoked mixed reactions. While less than contraction (-7.3% yoy) in overall FY21 real GDP is a matter of comfort, sharp contraction in private consumption and continued weakness in manufacturing (-6%) is a subject to be worried about. The better than expected economic performance has mostly been outcome of strong government consumption expenditure and large subsidies extended as part of various tranches of stimulus.

In the last quarter of FY21, India’s real GDP witnessed a growth of 1.6%. This is in spite of a poor base of mere 3% growth in 4QFY20 (disruption started in the base quarter) and significant relaxations in lockdown restrictions. This clearly indicate that normalization of economic activities might take much longer than earlier estimated.

I have always stated that quarterly growth data has little relevance for investors. It may hold some relevance for the policymakers to assess if any course correction is needed, but for a common investor it virtually has no meaning.

I also believe that extrapolation of annual real GDP growth data to immediate future years may also produce misleading results. The large projects that started in a year contribute to GDP through Gross Fixed Capital Formation (GFCF) head. However, the second and third round impact of these projects takes years to reflect in GDP growth; whereas the second round impact of consumption expenditure are usually visible relatively in lesser time. It would therefore be appropriate to judge the longer term trend in GDP growth to assess the likely growth trajectory in short term, (1-2years). I usually use 5year rolling CAGR in GDP to assess the likely growth trajectory of GDP in next couple of years.

This trend forewarned of a prolonged economic slowdown as early as FY11-FY12 (see chart). The long term (5yr CAGR) growth trajectory slipped below 6% in FY20, even before the pandemic induced slowdown was triggered. If we adjust the growth for FY21 and FY22 for sharp fall in FY21, and assume a 9% real GDP growth for FY22, we may end up with almost no growth during two period of FY21 and FY22. Assuming a further 8% growth for FY23 and 7% thereafter, we shall be able to attain the long term 6% growth trajectory only in FY27. A higher trajectory would be possible only post FY27. This essentially implies the following, in my view—

1.    The fiscal leverage with the government will become incrementally lesser. So unless the government decides to shed its inhibition and increase the capacity of its printing press, sustaining higher government consumption expenditure will become increasingly challenging.

2.    The private consumption demand might not improve materially in next couple of years as real household income remains stagnant. Discretionary consumption growth will particularly be impacted.

3.    The manufacturing growth will largely depend on exports and capacity building for import substitution. Technology leadership would be more important than the capacities.

4.    Construction and construction material sectors will overwhelming depend on government expenditure on capacity building.

5.    For next couple of years agriculture would remain mainstay of economic growth.