India’s Growth Driven by Investment and Efficiency By Investing.com
The Indian economy is on an impressive growth trajectory, with GDP surging 7.8% year-on-year in the March quarter, setting the pace for a robust 8.2% growth in fiscal 2023. This is one of the highest annual growth rates since the global financial crisis. Despite signs of cooling in the previous quarter, which saw growth exceeding 8%, India’s performance is commendable, especially given the sluggish global economic environment. So what are driving this economic dynamism?
Significant investments have been made in the 2023-24 financial year. Real gross fixed capital formation increased by an impressive 9% year-on-year. However, after peaking at 11.7% in the September 2023 quarter, it slowed noticeably to 6.5% in the quarter before the election. Meanwhile, private consumption growth has maintained a steady pace of around 4% in recent quarters. This surge in investment, although slowing, is underpinned by several important factors.
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One important aspect of this investment boom is the limited use of leverage. Broad money growth remains at a moderate 11%, helping to keep nominal GDP growth under control. Private sector leverage remains stable at 90-92% of GDP, compared to just 55% for non-financial companies. Although retail bank credit growth is high, overall commercial bank credit growth was up around 15-16% year-on-year through the March quarter. This prudent fiscal management meant that the investment boom did not lead to overheating or significant inflationary pressures.
Producer price inflation remains low, indicating weak pricing power. This stability suggests that real GDP will not be adjusted significantly downward due to hidden inflation. For consumers, the inflation rate, as measured by the Consumer Deflator, slowed to 5.3% in the March quarter and is expected to stabilize near 4% this year.
India is also witnessing significant increases in efficiency thanks to IT advancements and nascent reforms. These changes streamline processes such as payments, logistics, retail distribution, and tax processing. This improved efficiency helps to disclose more measured GDP in real terms. If the current government remains in power, further reforms may further strengthen this trend, indicating that India’s potential or growth trend may be higher than previously assumed.
Another positive factor is that the current account deficit is less than 1% of GDP. Unlike the past, when rising leverage led to imbalances and overproduction, 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 large external deficits.
In conclusion, India’s recent rapid growth is underpinned by strong investment, controlled leverage and improved efficiency within a stable external environment. This reflects a higher potential growth rate than is generally recognized, suggesting a more sustainable growth path forward. This analysis is based on insights provided by UBS.
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