Factors that support India retain the shine amid global gloom

There are several trends which have helped India remain resilient amidst global turmoil. We will have to build on these to remain one of the fastest-growing economies over the next decade.

The world economy is going through a tumultuous phase. Aggressive tightening by major advanced economies' central banks has led to a bleak outlook for global growth. Against this backdrop, the World Bank recently cut India's GDP forecast for FY23 to 6.5 percent (from 7.5 percent earlier). However, India will still remain one of the fastest-growing major economies in the world. This brings us to the question that what has worked in India's favour for it to maintain decent growth amidst global gloom. We identify five reforms/policies which have helped India to grow faster and will continue to aid growth in the medium term.

India's low external debt

The first and the most important has been India's low external debt which has insulated it from external volatility in times like these. In recent weeks there has been a lot of buzz around India's inclusion in the global bond indices. Historically, India has always been uncomfortable about foreign investors owning Indian debt, hence through capital controls, has kept foreign ownership at bay.

On the sovereign front, India's exposure to foreign ownership of government debt has historically ranged between 1 percent and 2 percent. India's debt exposure to foreign ownership is far lower than most of its peers. The only major economy that has a lower debt exposure is China. This has worked well in India's favour where most of its debt is domestically held and hence not prone to huge movements in currency in times of heightened uncertainty.

The second trend has been the perceptible change in the composition of financial savings of households. Though overall household savings to GDP has been on a decline, the share of financial savings in overall household savings has increased lately. However, the shift in financial savings has been more interesting.

RBI's quarterly household financial savings data suggests, between Q4FY20 and Q4FY22, mutual funds owned by households grew by a whopping 34 percent per annum compared to currency held (14 percent growth) and bank deposits (10 percent growth).

Covid-related fears also led to growth in life insurance funds purchased by households; it grew by 17 percent per annum during the same period. The share of bank deposits within financial savings has been declining and that of other products increasing. This trend will eventually lead to a deepening of both debt and equity markets in the long run.

Low corporate debt

The third positive trend has been the improvement in corporate debt and profitability in recent years. India's investment sentiment since FY12 was plagued by what is called the twin balance sheet problem where corporates were overleveraged and banks were saddled with high non-performing assets (NPAs). These trends are looking much better now with corporate debt the lowest in the last 15 years and banks' NPAs under control.

Success of DBT

The fourth transformation which has taken place in India is the revolution called the Direct Benefits Transfer (DBT). The amount disbursed under DBT has increased substantially over the years. In FY22, the Government transferred a total of Rs 6.3 trillion, or roughly 3 percent of GDP, through the DBT route (up from Rs 1.9 trillion in FY18).

Since the adoption of the scheme, more than 50 ministries have used DBT to transfer money in as many as 319 schemes. This has led to total savings of Rs 2.2 trillion. This also helped Government to expand the welfare state efficiently.

Undoubtedly, the DBT became a potent tool during the pandemic which helped the Government provide benefits to millions in need which cushioned consumption at the bottom of the pyramid.

Government's thrust on capex

Finally, the Central Government has pushed the pedal on capital expenditure (capex) in the last three years. Capex share in overall expenditure has increased from 12 percent in FY18 to 19 percent in FY23 (budgeted). Focusing on capex is a welcome move as it has a higher multiplier effect.

According to data from the National Institute of Public Finance and Policy (NIPFP), a rupee spent on capex can bring in output worth Rs 2.45 in the same year and by a cumulative Rs 4.8 in the next 7 years.

Although India will not remain insulated from the global turmoil in this inter-connected world (especially on the exports front and financial market volatility), these five trends will help maintain a decent growth rate in the coming years.

We will need to build on these to cement India's position as the fastest growing major economy in the next decade.