The question of structural growth

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 The question of structural growth

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• Global thinking on India: Investors are re-thinking their investments in Indian equity markets, something that was unheard of till 2019. Five years of underperformance has made global funds question - do we need a dedicated India exposure at all? 2014 and 2020 are two different worlds altogether!
• The positives for India: India is a democracy, with a rule of law. Its demographics are positive, youth is aspirational and entrepreneurship is well-developed. Growth has a long runway ahead, and product market penetration too. Productivity enhancement potential can mean India can go where China went in past 20 years. 
• FY21 contraction: Experts reckon that after a 2 to 5 % contraction in 2020-21, the economy will grow back to its 2019-20 size by 2021-22. The real question will be - what is India's structural growth rate through the 2020s going to be? Just 4 - 5%, or 7% plus? That answer will determine investors' mood.
• The real questions to ask: Investors must ask the right questions that go beyond the short-term troubles.

1. The rate of growth will determine the nature of problems that India will face. 
2. A real growth of 4% means nominal growth of 8-9%. That cannot stabilise the debt/GDP ratio nor can it deliver a higher quality of life. Tax buoyancy will be low, so infrastructure creation will be weak, and ratings will drop.
3. Poor growth will mean poor per capita incomes. That means poor consumption. So corporate earnings will drop. So investors may not show interest.
4. But at 7% real GDP growth rate (11-12% nominal) things change. All the problems mentiond above start getting resolved. 

• Recent slow growth:The slow growth from 2018 was due to problems of financial sector (NPAs), reforms related costs, and government's slow speed in structural reforms. 

1. The PSBs are under-capitalised and poorly run. Corporate debt markets aren't deep enough, and NBFC model is under a cloud.
2. The end of the pandemic moratorium period may hold nasty surprises for everyone (credit deterioration).
3. More capital is needed for this sector.

• Steps to resolve: GDP growth won't come without fixing this sector. More capital infusion in PSBs, partial privatisation, NBFCs' AQR (asset quality review) and a Bad Bank - are all needed now. Without all this, funding for high growth won't happen.
• Recent reforms: The major reforms like GST, RERA and IBC have led to more formalisation in economy, and some consolidation too. Some groups are gone, and better-managed firms remain. That is not a bad thing.
• 2020 decisions: The government has tried to reform the agriculture marketing system. More reforms have come in power sector, PDS and ease of doing business. Major pending reforms in administration and factor markets are awaited. The businesses that are left standing today need support. India's potential needs a wholesome reforms package, for it is India's destiny to be a fast-growing economy.

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