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Minhaz Merchant

Minhaz Merchant is the biographer of Rajiv Gandhi and Aditya Birla and author of The New Clash of Civilizations (Rupa, 2014). He is founder of Sterling Newspapers Pvt. Ltd. which was acquired by the Indian Express group

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Economy’s Inflection Point

India has lost a year’s growth due to the Covid-19 pandemic. But with reforms like the Gati Shakti masterplan to coalesce and boost projects under the $1.5 trillion National Infrastructure Pipeline and a turbocharged PLI scheme to make India an export hub, the country could make up for lost time faster than anyone could have rationally expected a year go.

Photo Credit : PTI

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The Indian economy faces a pivotal moment. A post-pandemic bounce is visible. But there are headwinds on the horizon as well.

Key economic indictors are up: exports, foreign direct investment (FDI), Purchasing Managers Index (PMI), Index of Industrial Production (IIP), GST, direct tax revenue and corporate profits.  

The Production-Linked Incentive (PLI) scheme has been embraced by domestic and international companies. It now extends to over a dozen sectors. 

Indian startups are attracting big-ticket investment from foreign funds. India is rapidly becoming a global leader in fintech, edtech and SaaS (software as a service). The transformation to digital and cloud, catalysed by structural changes in the way international companies operate in a post-Covid environment, could prove another Y2K moment for Indian infotech companies.  

Consumer confidence too is returning. So is hiring. The usually circumspect Mahesh Vyas, managing director of Centre for Monitoring Indian Economy (CMIE), conceded in his Business Standard column on October 12, 2021: “An optimism of sorts is in the air. Perhaps it is a reflection of an economic turnaround. Recent data suggests that the economy is reviving. Tax collections, foreign trade, electricity generation have all been convincingly and consistently buoyant so far in this fiscal year. Employment conditions and consumer sentiments also improved dramatically in September. 

“Further, in the week ended October 10, consumer sentiments vaulted by an extraordinary 9.8 per cent. To benchmark this, note that the mean weekly change in consumer sentiment has been 0.6 per cent and the median 0.5 per cent over the past one year. A near-ten per cent increase is, therefore, worth taking notice of, particularly as it comes on top of three consecutive months of steadily improving sentiments. The growth seen in macroeconomic indicators seems to be in harmony with the direction in which the mood of households is veering. Something seems to be working for Indian consumers. 

“The index of consumer sentiments scaled up by a handsome 7.9 per cent in September. This came on top of a 1.7 per cent increase in August and a massive 11.1 per cent jump in July. The cumulative gain in the past three months was, therefore, impressive.” 

Vyas has been a consistent critic of the Narendra Modi government’s economic policies, especially the failure to generate jobs. His change of tone is significant. 

And yet with headwinds on the horizon, there is reason to keep the country’s guard up. Crude oil and fuel prices continue to rise. Coal shortages can hobble industrial production unless they are sorted out quickly. Inflation is under control – for now. But a rise in commodity prices, which have so far been largely absorbed by industry, can stoke prices and dent the rising consumption graph. 

Global chip shortages have already hit production of automobiles and electronics. China’s unprecedented power crisis has affected supply chains across the world. 

Some of the granular numbers from the Controller General of Accounts (CGA) however offer clues to the future trajectory of the Indian economy. Corporation tax revenue has grown 51.2 per cent from pre-pandemic levels. That is a reflection of cost rationalisation by companies during the pandemic as well as lower corporate tax rates that kicked in from the last fiscal. Income-tax revenue has risen by 20.5 per cent from a pre-pandemic base. Direct taxes have grown even faster at 32.8 per cent.

Reforms are now on the fast track. After seven years of relative ennui, the Narendra Modi government has turbocharged privatization. Following Air India’s sale to the Tata group, several public sector units (PSUs) will be privatised before March 31, 2022. 

The most important of these obviously is Life Insurance Corporation (LIC). When listed, it is expected to have a market capitalization in the range of Tata Consultancy Services (TCS) and Reliance Industries. Several foreign marquee investors are lining up to bid for a stake in LIC. 

LIC’s privatisation could fire up the stock market and pave the wave for more privatization among over 80 currently listed PSUs. Many like Bharat Petroleum and Hindustan Petroleum have top-of-the-line assets. 

Initial Public Offerings (IPOs) have set a new record. Between January and September 2021, according to EY, 72 IPOs garnered $9.7 billion in initial sales – the highest for a nine-month period in two decades. 

Rural markets hold the key to India’s economic success. And the signs here are propitious. For the quarter ended September 2021, FMCG sales in rural India rose 58.2 per cent over the year-ago quarter compared to a more moderate growth during this period of 27.7 per cent in urban India, according to a survey by the tracking firm Bizom. 

Meanwhile, the core sector has grown steadily as well. In August 2021, the IIP shot by 11.5 per cent over August 2020. With good tax numbers, the fiscal deficit in 2021-22 is likely to be at least one percentage point lower than Union Budget estimates.  

Finally, then to GDP numbers. Most investment banks are sticking to their forecast of 9.5 per cent real GDP growth in 2021-22. NITI Aayog Vice- Chairman Rajiv Kumar is more bullish: he expects GDP this year to rise by 10.5 per cent.  With GDP dipping by 7.3 per cent in 2020-21 due to the total national lockdown that lasted for over two months, Indian GDP in March 2022 will nonetheless be only a shade above the level of March 2020.  

However, nominal GDP which factors in inflation will raise the GDP number  significantly. At current prices therefore (factoring in an average consumer price index of around 5 per cent in FY21 and FY22), nominal GDP in March 2022 will be around Rs. 225 lakh crore. At an exchange rate of Rs. 75 to a dollar, that translates into $3 trillion. 

India has lost a year’s growth due to the Covid-19 pandemic. But with reforms like the Gati Shakti masterplan to coalesce and boost projects under the $1.5 trillion National Infrastructure Pipeline and a turbocharged PLI scheme to make India an export hub, the country could make up for lost time faster than anyone could have rationally expected a year go.  


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