In a recent note, you said that you expect India to be the third largest economy in 10 years. What gives you the conviction that India is going to take the lead from China, Japan, Europe, and US?
We see the economy growing at 9% nominal, that is 6% growth, 5% inflation, and 2% depreciation for the next two years. There are three drivers. The demographic dividend which we have all been talking about for the last 15 to 20 years is actually going to kick in from 2020 and help savings and investments. Secondly, there is financial deepening. Compare it to GDP ratio, which is around 40 to 50 per cent of GDP, should jump almost 100%. And thirdly, there is the emergence of mass markets, which the US probably saw 100 years ago. For example, the price of an entry level car today is 2.5x down from 14x 20 years ago. We think that is close to 1x on export basis.
Apart from this, there are two big catalysts that we have seen emerge over the last one year. The first is that the RBI has now re-achieved adequacy of FX reserves. We call this ‘India’s silent revolution’ because you now have sufficient FX reserves, and you also are de-risking India from global contagion. You are likely to see a much more stable rupee for the next 10 years. Number two, from 2016, high real lending rates were a drag on the economy and that got corrected after Mr Das took over and began raising on a sustained basis. These two factors – the fact that RBI is backed with adequate FX reserves and their lending rates are now coming off – give me the confidence that India will emerge as the third largest economy.
Are there any assumptions that you are making about inflation and interest rate trajectory when you say India’s economy is going to move up two notches from being the fifth largest in the world already? And are inflation and interest rates also going to be guiding factors for the GDP to move higher?
Yes, we are looking at 6% growth in real terms. We are looking at 5% inflation, which is pretty much in line with our estimates of threshold inflation — that even the RBI has come out with –and 2% depreciation. Interest rates we assume will be at a nominal level.
Will India moving up two notches be at the cost of other countries easing off? Or would you say there is going to be a rising tide which will take the other global economies higher along with India in the next 10 years?
Yes, I think that India has relatively higher growth than the rest of the world. There is a chart in my report which shows that we begin by overtaking Canada in 22 I believe, along the way there was Brazil, Russia, UK, France and then Germany in 2027. We are growing at around 9% nominal. Japan for example is growing at 1.4% nominal.
We are growing faster because of two catalysts — RBI buying back FX reserves and interest rates coming down. Secondly, though the globe matters, India should be doing better than other countries even if there is a global downturn. Especially now, given that we have sufficient FX reserves that de-risks us from the rest of the world. Effectively, large depreciations we saw during the global crises should now be history.
What would be some of the key concerns that you have that could derail growth apart from the coronavirus vaccine? What else would you take cognizance of?
In the medium term it is oil. Obviously, if oil goes beyond $100 a barrel on a sustained basis that will hurt the Indian economy. Otherwise, the internal drivers of the economy are very strong from a structural perspective. Now you have sufficient FX reserves to ward off contagion. When you take both into account, the biggest challenge is oil shooting up and staying at more than $100 a barrel.
How are you looking at the India growth story? What do you make of the current parameters with respect to the fiscal position, the government’s divestment plans and measures to deal with the pandemic?
In the near term with measures to deal with the pandemic, we expect growth to contract 6.4% this year and rebound by 9%. As far as the current state of reforms go, we have not explicitly modelled them in our numbers. We would probably see 50 to 100 bps increase in GDP growth and then India would overtake Japan in 2030 with steady growth.