India on the Cusp of a Sustained Growth Revival

Quantum Advisors India

Building your India portfolio since 1990 on a foundation of ethics, integrity & disciplined investment research process.

The relevance of GDP growth as the one key measure of a country’s development has long been challenged. The threats from climate change and the social impact from COVID should make it clear that a single-minded quest to target GDP growth can no longer be any nation’s priority.

We do know from the way the GDP statistic is computed that it leaves out a lot of activities which actually matter to the daily lives of its citizens – for e.g - clean air, quality of health and education, income and social justice.

Technological changes and innovation have also brought about massive changes in the different factors of production and consumption. Today’s GDP calculation may not reflect the underlying economic activity. Economists and policy makers have for years asked for alternate measures to gauge growth and development, however in the absence of any other simple and easy to understand and globally comparable statistic, the GDP data remains the measure of choice.

In India, we have faced a different issue. Ever since the GDP series was re-based to 2011-12 and changes were made in the methodology for value added and deflators, the GDP data and the other usual macro indicators have been at odds. Arvind Subramaniam, the ex- Chief Economic Advisor to the finance ministry, in a brilliant paper, estimated that average real GDP data between the period 2011-12 to 2016-17 may have been overstated by about 3% percentage points.

At Quantum, puzzled by the high GDP readings post demonetisation and GST as compared to other macro indicators which remained weak, we began using a naïve approach to estimate actual real GDP at 1.0%-1.5% below the reported data.

We began indicating to our internal teams and to external investors that the Indian real GDP number is over-estimated and is no longer a relevant measure to gauge economic activity and that we should focus on other real-time measures of macro indicators and corporate activity.

By 2019, the multi-year slowdown in household and corporate investment activity, the bad and unresolved state of the banking and financial system, the fall in Indian exports and the destruction of income and employment in the informal economy, got us to question our long held long-term real GDP growth estimate of 6.0%-6.5%.

The government’s feeble initial response with the ‘Atma-Nirbhar Bharat’ (self-reliant India) package post the harsh COVID related lockdown in early 2020 further convinced us that the scarred India economy would take a long-time to get back to its long-term potential.

The recovery since has been much better than expected and has raised hopes. However, will India get back to a higher growth trajectory? India needs sustained long-term growth to pull people out of poverty, create jobs for the young and to boost incomes to widen the consumption base. That growth, as the table below shows, then reflects in the long-term return potential in the India asset markets.

Table 1: GDP Growth drives long-term market returns

Disclaimer: The figures mentioned in the above table are based on the assumptions and estimates made by Quantum Advisors. “An intelligent portfolio” mentioned above refers to a portfolio constructed by an investment manager following an active approach to investing with an appropriate research and investment process in selecting stocks. These growth rates or indicative rates of return may or may not be achieved.

Can India grow at 7%?

The answer to this proverbial question on India’s potential growth rate depends on the period in which the question was asked:

· If asked in the 1980s - the hopeful answer would have been 5%

· In the 90s, post liberalization, hopes had risen for a sustainable 6% growth rate

· In the ‘Goldman Sachs - BRIC’ mania of 2004-2011, it was India’s birth right to grow at 9%

· Morgan Stanley’s ‘Fragile Five’ in 2013 smothered it down below 8%

· ‘Ache Din’ in 2014 raised hopes of 8% again

· In ‘Atma-Nirbharta’, many seem to be settling for 6%.

Chart 1: India’s growth peaked in 2011 and has been on a slide ever since

(Source: MOSPI, CMIE, Annual Data till March 2020)

Chart 2: Business sentiment rising, consumer sentiments have a long way to go

(Source: RBI, CMIE Consumer Sentiment data till October 2021)

The recovery in economic activity including in the GDP data has been much better than expected. However, below we want to look at some long term macro trends to see if this gives us enough confidence to put India on a sustained growth path. 1) Modi sheds his fiscal conservatism:

In an earlier Q India insight piece, ‘A Rating for Growth’, we had opined that India’s investment grade rating is a rating for India’s growth potential. Despite the high debt to GDP ratios, the rating agencies expect India’s growth to solve its macro challenges. It was thus good to see India using its fiscal levers to get back growth and spending. This was one of the big reasons for us to feel comfortable about India getting back to its 6.0%-6.5% long-term growth potential.

The government announced in its 2021 budget to not only keep the fiscal deficit wide this year but that the Centre’s Fiscal deficit will be 4.5% of GDP till Fiscal year 2026. As per a legal mandate, India was supposed to limit fiscal deficit to 3% of GDP. This was always unreasonable and exacted rather large demands of the government from fulfilling its social obligations. This increase in fiscal deficit allows a cumulative spending of approximately ~USD 1 trillion (~30% of current GDP) in the coming 4 years for the centre alone. If used to spruce up spending on infrastructure and improving the quality of health and education, it can boost long-term GDP.

Chart 3: Government capex spending to rise in the next 5 years

(Source: ind