The way ahead for the Indian economy
Despite the heavy blow wielded to the Indian economy last year by the COVID-19 pandemic, the economic landscape has already started looking lush and appears set on the path to regaining its health. In fact the latest Economic Survey a 'V-shaped' recovery for the economy and an 11 per cent real GDP growth in 2021-22.
Rise in domestic consumption, coupled with a boost in manufacturing which attracts the best brands from across the globe and the wave of digital transformation in the public and private sectors that have paved the way for novel business practices have aided India’s economic recovery. Gautam Srinivasan gets Maneesh Dangi, CIO-Fixed Income, Aditya Birla Sun Life AMC Ltd to deconstruct the current economic scenario, India’s prospects of becoming a $5 trillion economy in the near future and what this means for the Indian investor.
From license Raj to Digitalisation
The IMF projected a 11.5 per cent growth rate for India in 2021 and the OECD has also raised India’s economic growth forecast to 12.6% for 2021-2022. Dangi opines that a discussion on the economy bouncing back and the encouraging forecast would be incomplete without taking into context the transition that the Indian economy has witnessed. “We actually moved from somewhat a feudal society pre-independence which was essentially an exploitation raj run by the British to just after independence for a couple of decades to a planning-based socialist apparatus. The license raj continued to the early 1980s which eventually which gave way to the free market economy. So, in the last 30 years we have moved from a planning, socialist, bureaucratic set up to a more free market economy structure where most asset allocation , most capital decisions are based on market perceptions as opposed to what bureaucrats think and more and more businesses are being run by entrepreneurs. That’s the transformation that has taken place from a historic stand point.”
With respect to the catalytic impact of digitalization, Dangi explains, “It is fair to say digitalization is the fourth industrial revolution in front of us. To a certain extent, in terms of industrialisation, we remained an agrarian economy for very long. Digitalization moved the curve faster than what our per capita would suggest.”
The differences in economic models
While headlines make it easy to draw comparisons among economies of different countries and pave the way for wishful thinking, the debate on whether India’s economy will be catapulted in a certain bracket has to take into account the differences in various economic models. Dangi says, “In hindsight, the formula of the state being solely responsible for the planning and development of a country hasn’t worked not just in India but across the world and that formula is no longer on the table. What is there on the table right now is the free market model which is practiced by most of the OECD countries. The other model is the one prevalent in Asia which is a bit of a top down authoritarian capitalism where state plays a significant role in asset allocation, building a business - which you could call the China model as well and which has also been followed by other Asian economies to a certain extent including Japan and South Korea.”
Explaining why emulating the growth figures of such countries may be an inappropriate goal, Dangi says, “The ten percent plus growth rates that we have seen in China and Japan won’t happen in our country because that required far too many boxes to be ticked that is perhaps not possible in a democratic federal set up. We have done reasonably well in last 25 years. If you compare this with China and some of the other Asian economies in terms of what they did in their wonder years, they have been able to do far better than what India has been able to put together in terms of growth rate. But yet, with respect to our own history, the older generation perhaps saw zero growth in per capita terms but my generation has experienced sort of a 4-6.% percent per capita growth over the last 25-30 years and that’s a good deal I would say. We have been remarkably resilient and its going to be a trade off – is a China-like set up more desirable with another 2-3% growth? But that choice is not on the table – we are a democratic set up and there are limits to which reforms can be undertaken because reforms invariably have some or other people getting hurt.”
The strengths and the way ahead
According to Dangi, India’s growing labour force, low debt levels and low household leverage have helped the economy escape major scarring from an exigency like coronavirus. The push for economic reforms in the last few years will also propel India’s growth trajectory in the future. “I am more optimistic on India’s story today than I have been for the last couple of years and I think India can grow more than what it has been used to which is 6-6.5 percent because we have undertaken some serious reforms – India has had a reasonable tradition of reforming itself especially after mid 80s and some of the reforms that have been adopted in the last few years – for instance, we have built a digital infrastructure and then GST has made India one market and in a scale that GST provides today because of converting Indian fragmented markets into one market could be humomgous and its benefits will unfold as we move forward. The Insolvency and Bankruptcy Code has been a much needed reform and agricultural reforms are likely to unshackle the agricultural market and make them more open.”
Dangi says the undercurrents of change in the geopolitical arena have also put India in an advantageous position. “The coronavirus pandemic has made most of the developed countries see China as an adevrsory and the Indo-Pacific region is increasingly becoming a place what Middle East and Europe were at different points in time. The region has become pivotal to Western economies in terms of strategic thinking. There are a lot of strategic implications from an economic standpoint because China is being seen as a competitor to the US and West, I think there is an opportunity opening for India which is a more liberal democratic set up and we need to make use of this opportunity,” he signs off.