If one only looks at the stock markets, it’s been a rough roller-coaster ride. If you look at just the last quarter’s GDP growth or even immediate GDP forecasts, there are reams of negative predictions for the Indian economy.
But if one truly understands the structure of the Indian economy and also factors the global economic slowdown, it becomes clearer that India’s growth rate is still at the forefront.
Yes, we are facing short-term challenges, particularly on consumption growth, but these appear to be cyclical and not a deep-rooted malaise. So the big question on everyone’s mind is how will India achieve its goal of being a $5 trillion economy?
Today, India is a $2.8 trillion economy. A pertinent question is how did we get here? I can virtually say this in my sleep now, but this is the most fascinating part of the Indian economy. It took India 60 years post-Independence to become a $1 trillion dollar economy in 2007.
It took another seven years to become a $2 trillion dollar economy in 2015. India is likely to be a $3 trillion economy in 2020. The key point is that each trillion is being added in a shorter time span. If India’s economy isn’t $5 trillion by 2024 as envisaged by the government, it will certainly achieve it a year later.
The question is not whether India will become a US$ 5 trillion economy, but how soon we can attain this goal. There is no other major economy that currently has the capacity to absorb the scale of investments that India needs and has the growth potential that India does. Do remember, India accounts for 17% of the world’s population.
We must always bear in mind that India is not the only game in town. Several emerging market economies too are fiercely competing to attract global capital. The other key reason why India’s macro parameters are currently fairly strong is that oil prices have remained fairly moderate.
RBI has ensured that there is adequate liquidity in the system and having reduced policy rates by 135 basis points this year, the central bank is trying to ensure effective monetary policy transmission happens. The crux of the problem with the financial sector is that the flow of credit to the commercial sector is still clogged.
In the first six months of the current financial year, the total flow of resources to the commercial sector from banks and non-bank sources was only Rs.0.9 trillion compared to Rs.7.4 trillion in the previous year – that’s a drop of 88%. This clearly reflects the risk averseness in the system. Since the time the Asset Quality Review began in 2015, banks have scaled back lending.
Till last year, the commercial sector relied heavily on non-bank funding sources as a substitute. When non-bank funding sources got choked, it threw the financial system into a tizzy. The underlying point is that the Indian economy needs both, banks and non-bank sources to meet its funding needs.
And the key hurdle now is getting over the trust deficit. Several companies are still unwinding their overleveraged positions. Leverage is a double-edged sword. In good times, it helps to scale up and amplifies profits, but in a downturn, over-leverage has seen the downfall of many.
A simple rule is that capital must always be raised from a position of strength and not when one’s back is up against the wall. The second key rule is managing reputational risk. It takes years to build a reputation and seconds to destroy it.
Trust and confidence are the backbones of any financial system. Never underestimate the power of ethics and values. It is a pity that this is so often eroded. To my mind, there is no greater cardinal sin in finance than the misuse of the common man’s hard-earned savings.
It seems brutally unfair that we have allowed a system of loan waivers and write-offs every now and again, but yet we do not have robust enough financial systems to protect the honest, common man’s savings. And mind you, this isn’t just a problem in India but the world over. India needs more savers in the country if credit has to grow.
The savings rate at 30% of GDP has been showing a declining trend over the past decade. Household savings is important for the Indian economy and that is why there is likely to be a threshold beyond which lowering interest rates becomes difficult. Indian savers prefer assured returns which is why fixed deposits continue to remain the preferred choice of savings.
We have got to get younger people insured much earlier in life. We have got to get more youngsters to become patient, long-term savers and investors in equities and mutual funds. And I am optimistic enough to believe we are moving in the right direction.
In 2014, assets under management of mutual funds hit the Rs.10 trillion mark and in just three years, in 2017, it doubled to Rs. 20 trillion and as at August 2019 it stood at Rs.25 trillion. 57% of industry investor base are retail investors. India still remains a hugely under-penetrated financial market and that is where the focus of growth should be.
— Co-ordinated by Reagan Gavin Rasquinha
