Mar 15 2024, 07:11
Are high interest rates preventing India from replicating China's double-digit growth?
Reforms like GST rollout and digitalisation were estimated to add another 2% to the GDP. But that has not happened. Capacity utilisation levels are below 75%, while private consumption growth has been slowest. Experts feel lowering interest rates may help. Is India punching below its weight?
In the 2014-15 Economic Survey, the then chief economic adviser Arvind Subramanian wrote, "Facts and fortune have aligned in India's favour" to propel the country onto a double-digit medium-term growth trajectory. Subramanian argued that India was in a sweet spot, rare in the history of nations, wherein a historic political mandate coupled with stable external environment will lead to sustained reform push.
It was seen as natural for a large enterprising economy like India to follow China's path of multi-decade double-digit growth. Reforms like the Goods and Services Tax (GST), once stabilised, were estimated to add nearly 2% extra to GDP (Gross Domestic Product) growth Digitalisation of the financial sector was an icing on the cake.
While everything is aligned for India to grow, the fact is Indians are simply not consuming to the extent the economy demands. Some believe it is the high interest rates, others point out to high GST, while a few say there are just not enough jobs to buy things.
Private consumption is stagnant for the past 10 years. Even corporates are not building capacities. However, on lower capacities, they have seen high increase in sales - especially in high-end cars, air conditioners and real estate. But this demand is limited to the top 5 crore people.
Despite all growth levers in favour, India is not growing at its best possible rate. But expectations are high. In fact, large corporates are seeing high asset turnover ratios closer to 2.17x for 2023 as compared to 1.69x in 2019. This looks like an improvement in demand for corporates to add additional capacities, but we need to wait and see.
All arrows point towards high interest rate in India which is hampering growth. There are policy experts who believe that can be brought down from 6% to 4%, thereby kickstarting demand.
India is the fastest-growing large economy with fresh estimates pegging 2023-24 growth at 7.6%. A score of agencies including Moody's have bumped up their growth forecasts for the country. But key questions remain - is India punching below its weight? Have we narrowed ourselves into thinking that 7% is the potential growth?
True, the world has seen several disruptions post pandemic. The fastest pace of monetary tightening by the US Fed starting 2022 was projected to topple the world economy into recession. But recession fears have come undone, as the US economy continues to cruise at a high-altitude growth and the International Monetary Fund projects global growth of 3.1% in 2024 and 3.2% in 2025. The UK and Japan - two of the G-7 countries - have slipped into recession recently, but their combined share in world GDP is below 5%.
source: et
Nov 28 2024, 14:03
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