India's economy has been on an impressive growth trajectory, with its GDP rising 7.8% year-on-year in the March quarter, culminating in strong growth of 8.2% for fiscal 2023. This marks one of the highest annual growth rates in the post-global financial crisis era. Despite signs of cooling from previous quarters exceeding 8% growth, India's performance is commendable, especially considering the sluggish global economic environment. So what is fueling this economic dynamism?
Fiscal year 2023-24 has been characterized by substantial investments. Real gross fixed capital formation increased by an impressive 9% during the year. However, there has been a notable slowdown from peak growth of 11.7% in the September 2023 quarter to 6.5% in the pre-election quarter. On the other hand, private consumption growth has maintained a constant pace of around 4% in recent quarters. This increase in investment, although slowing, is supported by some crucial factors.
Offer: Click here and don't miss out on this exclusive offer to access premium features of InvestingPro including powerful filters, fair value calculator, financial health check, etc. and embark on your journey to financial success. And the best part? InvestingPro is currently available at a 10% discount.
A significant aspect of this investment boom is the restricted use of leverage. Broad money growth has remained at a moderate 11%, helping to control nominal GDP growth. Private sector leverage remains stable at 90% to 92% of GDP, with non-financial corporations accounting for only 55%. While retail bank credit growth is high, overall commercial bank credit has grown at a moderate 15-16% year-on-year during the March quarter. This careful financial management means that the investment boom has not led to overheating or significant inflationary pressures.
Producer price inflation has remained low, indicating weak pricing power. This stability suggests that there will not be large downward revisions to real GDP due to hidden inflation. For consumers, the inflation rate, as measured by the consumption deflator, slowed to 5.3% in the March quarter and is expected to stabilize near 4% this year.
India is also witnessing a significant improvement in efficiency, thanks to advances in IT and past reforms. These changes have simplified processes such as payments, logistics, retail distribution and tax management. This greater efficiency is helping to unlock GDP that is more measured in real terms. If the current government retains power, further reforms could improve this trend, indicating that India's potential or trend growth could be higher than previously estimated.
Another positive factor is the minimal current account deficit, which is just below 1% of GDP. Unlike past periods where rising leverage led to imbalances and overcapacity, the current balanced growth trend is reminiscent of the mid-2000s. This stable external position provides better support to the rupee and reduces risks associated with a large external deficit.
In conclusion, India's recent accelerated growth is supported by strong investments, controlled leverage and efficiency gains, all within a stable external environment. This suggests a more sustainable growth trajectory going forward, reflecting a higher potential growth rate than commonly perceived. This analysis is based on insights provided by UBS.
Now is the perfect time to take advantage of the opportunity! For a limited time, InvestingPro is available with an irresistible 10% discount. Click here and don't miss out on this exclusive offer to unlock the full potential of your portfolio with InvestingPro.
Also read: How to Unlock Investing Success: The Power of Cash-Rich Companies with InvestingPro+
x (formerly twitter) – twitter.com/AayushxKhanna” target=”_blank” rel=”nofollow”>Ayush Khanna
<script async src="//platform.twitter.com/widgets.js” charset=”utf-8″>!function(f,b,e,v,n,t,s){if(f.fbq)return;n=f.fbq=function(){n.callMethod? n.callMethod.apply(n,arguments):n.queue.push(arguments)};if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;n.queue=();t=b.createElement(e);t.async=!0;t.src=v;s=b.getElementsByTagName(e)(0);s.parentNode.insertBefore(t,s)}(window, document,’script’,’https://connect.facebook.net/en_US/fbevents.js’);
