Three leading economists shared insightful perspectives on the Indian economy during the session I moderated at the Morningstar Investment Conference held in Mumbai on September 20 and 21.
One of the panelists was UPASANA CHACHRA, Executive Director and India Economist, Morgan Stanley.
All the economists were unanimous about the fact that India has emerged as a very attractive investment destination, and a very stable economy in a very turbulent external environment. Upasana strongly believed that India was at an inflection point.
These are her views from the discussion.
India has emerged as a beacon of calm and hope in this otherwise very turbulent world.
What makes this time different for India is that the starting point of the macro position has been more solid than what we've seen in similar episodes of changes and commodity prices or the Fed tightening cycle.
The macro balance sheet is better, and there has been an improvement on the corporate balance sheet, the financial sector balance sheet and India's own external balance sheet. Corporate debt to GDP is currently at 15-year lows. Impaired loans are tracking at decadal lows again. Household debt is low versus per capita income.
This has helped ensure that the financial metrics like interest rate, currency, and equity market are responding very differently in a global inflationary environment, challenging external growth environment, and the Fed tightening.
India's growth fundamentals have definitely improved. If you look at where we are today, and where we were pre-pandemic, I think there has been a change in terms of the domestic drivers. We are seeing an improvement in the domestic demand-oriented indicators as well, which is providing some hope against the very weakening and increasingly challenging external environment.
There is a change that has happened versus the last decade that we saw growth being periodically interrupted by a series of exogenous shocks, and the outcome was that we had a very suboptimal sort of growth outcome.
As we start now, most of those shocks should be behind us and balance sheet positions are better. Globally, there is a focus on supply chain diversification, and India is being viewed much more favourably as an investment destination for companies that plan to set up new or incremental capacity.
Overall, India is a very stable and steady economy in a growing externally challenging environment.
A lot of factors are coming together, but we cannot deny the existence of ponderable issues.
Trade shocks and volatile commodity prices are among key concerns.
Given that India is a net commodity importer, what happens to commodity prices matter to us.
We can't wish away the global slowdown. Almost a quarter of India's GDP comes from exports. After the pandemic, exports have been the key driver of the recovery. So a slowdown in global growth will impact India.
There is possibility of financial conditions in the DM world tightening a lot more aggressively and their repercussions into India through the currency channel.
There are obviously risks on the anvil but they are more cyclical or external than domestic and structural. And I think they seem more reasonable or more manageable in this cycle than what we've seen in the past.
India at an inflection point.
The government has been focusing on capex, trying to do as much as they can through their own balance sheet, and creating an environment for private capex to return.
The corporate tax rate reduction that happened in September 2019 was extremely significant. We have not witnessed such a meaningful reduction in taxes probably in a very, very long time because usually the focus is to increase taxes and then redistribute. It was terribly unfortunate that a pandemic followed in close succession to such a landmark decision.
There have been more measures to promote capex through production-linked incentive schemes or a thrust on public infrastructure. This should continue because these are the measures that will help India not only in a cyclically challenging environment, but also from a structural or medium-term perspective. It improves India's growth potential and ensures that the growth path remains more sustained, and we see productive growth.
The government has stepped up on its structural reforms; the corporate tax rate reduction, fiscal incentives through the production-linked incentive schemes, thrust on public infrastructure - all of that indicates that the supply side factors are all coming together.
If we juxtapose the above with the improvement on domestic demand, we're already seeing that capacity utilization for March is at above the 10-year average, it's at 75.3.
So, basically, supply side and demand side factors are coming together after a very long period of weakness that we've seen in the last 10 years where the investment rate has continuously gone down.
Therefore, we think that we are set for an inflection point. And we should be expecting an inflection on the capex cycle because that is how we will attain virtuous and productive growth.
