By J Mulraj
Apr 24-30, 2022
A $ 5 trillion economy is achievable
India is currently ranked 6th in global GDP rankings in 2022, with a GDP of $ 2.66 trillion, a whisker behind UK, with $ 2.67 t. and then Germany, $ 3.85 t. UK will be overtaken this year, as its economy is slowing, with a 1.4% fall in GDP in the first quarter of this year. Consumer spending is down, and the Government of Boris Johnson is struggling with the after effects of his breach of Covid lockdowns, in order to party. Germany, too, is affected badly due to over dependence on Russian oil/gas, (which Donald Trump had correctly forecast but was unheeded). The Russian assault on Ukraine has brought out its vulnerability sharply and it has been forced to accept (as has Poland and Bulgaria) the Russian demand to purchase oil/gas in ruble, under threat of not getting any. The CEO of BASF had warned that half of Germany’s small and medium enterprises would shut down without it.
German GDP grew slightly, by 0.2%, in Q1 of 2022, and the forecast for full year growth has been lowered from 3.6% to 2.2%. It could be lower, for a few reasons. Exports to China (because of strict Covid lockdown in Shanghai and Shenzhen, two main trading hubs) and to Russia (because of the war and the sanctions) will drop. Also, because German retailers have increased food prices by 20-50%, which would definitely hit consumer spending on other things. It would take longer for India to overtake German GDP, but it should happen.
In fact, the IMF, in its latest World Economic Outlook projects Germany’s GDP to grow 2.1% in 2022, the UKs by 3.7%, and India’s by 8.2%. China’s GDP growth is expected by IMF to drop to 4.4% due to its strict Covid lockdown policy. Shanghai, a city with 22 m. residents, is locked down. It is a major trading hub for exports and imports, both badly hit due to the lockdown. Truck drivers are unwilling to enter Shanghai to drop off/pick up cargo, lest they be compulsorily quarantined. This has created a huge supply chain blockage, with over 470 ships and thousands of containers stranded there.
A lot has been written about the impending shortage of wheat due to the Ukraine war, as around 28% of the world’s wheat comes from Ukraine and Russia. But India is blessed with a wheat surplus, the rising prices of which will cushion the blow of rising prices of crude oil and gas. India also has production facilities for Covid vaccines, unlike China, whose vaccines are ineffective, and has fertiliser manufacturing facilities, another product hit by Russia sanctions.
Most importantly, India’s demographic profile, of a young population, is very favourable for a continued growth. One that will provide a big domestic market for all products, which is crucial at a time when global trade is badly disrupted. The era of globalisation, where production was outsourced to countries based on the theory of competitive advantage, has taken a huge shock from Covid disruptions. Countries have realised that dependency on other countries is dangerous (witness German dependency on Russian fossil fuel, compelling it to succumb to arm twisting on ruble payment). So almost all major countries are turning to ‘atmanirbharta’ or self-reliance in manufacture either at home or in friendly domains.
India’s PLI (production linked incentive scheme) has encouraged a lot of foreign direct investment, since India is viewed as a friendly domain by several countries, providing jobs. India’s start up system has blossomed, initiated by aspirations of a young¸ entrepreneurial India. Indian innovations like the UPI (unified payments interface) have made financial transactions simpler, cheaper, and faster.
Meanwhile China is facing not only the disruptions caused by a zero tolerance Covid lockdown policy, but also severe food disruptions leading to a likely shortage. Pork makes up about 60% of the Chinese meat consumption. Last year, the Chinese pigs were hit by the African swine flu, and many had to be culled. This year, because of the war in Ukraine, which supplies 2 m. tonnes of corn, used to feed the pigs, the output of pork would be hit. Besides this, the zero tolerance Covid policies have prevented farmers in villages hit by Covid to plant crops, or to get farm inputs from other regions hit by Covid. These are some of the reasons China’s GDP growth has been reduced in the IMF forecast.
These are all the positive factors that would propel the Indian economy to hit the $ 5 trillion target in a few years. But there are other factors which provide a wake up call to address them. India should wake up and address these, and not press the snooze button in a fit of complacency, as is our wont.
Everyone is aware of the backlog of judicial cases. In July 21 Chief Justice N V Ramana, speaking at the India-Singapore Mediation summit, stated that 45 million cases were pending. This HAS to be tackled if we are to achieve our goal of being a leading global economy. Far too much latitude is shown to scamsters who have looted from the public (all the Ponzi schemes where the perpetrators are running free, unpunished, due to judicial lethargy and investigative laxity) or from banks (all the debtors who were loaned money far beyond their capacity to service, many of whom have flown abroad). In several cases investigative agencies have actually seized assets, and monetised them, but have, strangely, not distributed the sale proceeds to the victims, but have retained the funds with themselves, God only knows for what reason. The courts must step in to correct this, but take up ‘high profile’ cases with urgency whilst delaying justice to smaller victims who have not the financial ability to move courts.
Whilst corruption may have reduced at the national level, and permissions to undertake projects may have become easier, at the state level, where citizens interface with officialdom, it continues unabated. This, too, must be tackled, as it serves to impede investment and growth.
The BSE sensex was steady, dropping 137 points last week to close at 57060.
That the Indian market is steady despite foreign portfolio investors withdrawing Rs 12,300 crores in April, and despite the fallout of the Ukraine war (high prices of Brent crude, coming shortage of wheat, fertiliser and other commodities, supply chain shocks from lockdowns, bans on exports such as Indonesian palm oil, on which India depends, etc.), is largely because of retail investors.
After decades of putting their faith in bank/company fixed deposits, Indian investors heard the siren song of the equity market, and have, largely, invested through mutual funds. They have been well rewarded, and are hooked. Many new investors have not yet seen a proper bear market. But the upside is huge. There are some 70 million retail investors with depository accounts, which represents just 5% of the population. As the equity cult becomes more popular, the numbers will grow.
Domestic mutual funds received an inflow of Rs 97,000 crores in 2021, an average of over Rs 8,000 crores monthly. In December the inflow was Rs 25,000 crores (twice the FPI outflow in April) and today the monthly inflow from SIP (systematic investment plan) is Rs 11,300 crores. This is sticky; retail investors having committed to an SIP, normally stick by it. This is why the FPI outflow was absorbed.
So yes, the India growth story is strong. There are a few areas of concern, as there always are and will be. These should, and will be, addressed. Yes, there can be a food and crude oil crisis, and yes, there will be a supply chain shock. When it happens, global markets will correct, as they will also be hit by rising interest rates, to combat inflation.
But, so long as retail investors keep their cool, and continue to pump in their SIP commitments, Indian stockmarkets will recover from any such fall.