Speed breakers like high inflation and high interest rates have always spelt trouble whenever India’s growth hits closer to double digit. Is that set to change?
As the famous quote goes, India disappoints both optimists and pessimists alike. It spares no one. One can never be too optimistic nor too pessimistic as India has stunningly surprised both when it comes to its economy. Its ability to bounce back when least expected gets marred by its magical prowess to let its faithful lieutenants down when expectations run high. Of course, there are reasons for this less reassuring spectacle. They come from the stifling structural constraints in the economy that come from supply side issues like inflation and credit risks (capital starved) etc.
This is the pattern we have seen in every growth cycle in the past without single exception. Every time when growth accelerates to near double digit, it hits the inflation and credit bumps that drag the growth in subsequent years. The drag (downturn) lasts for much longer time than the dazzle (upcycle) because of daunting bad debts, the growth cycle leaves as legacy.
Will the coming decade be any different? There are reasons to believe that this predictable pattern is in for a makeover, paving the way for more sustainable growth from the next cycle onwards. This optimism may be at odds with the current negative sentiment that has notoriously swept thro’ the nation. Not getting swayed by the sullen mood across, staying objective, one can see the structural shift that will potentially get unlocked by some of the key reforms like Bankruptcy Code (IBC) and MPC (Monetary Policy Committee). IBC is one of the most under-rated reforms of this administration. In our view, IBC and MPC will go a long-way in addressing speed bump challenges to transform the current bumpy economic roadways into high-speed highways for sustainable high-growth era. More importantly, this is likely to happen, irrespective of shape and color of the next political formation at the center.
To look at them more in details, let us take the MPC first. For the first time, at CPI (Consumer Price Index) level there is inflation targeting, that too statutorily. MPC, by statute, is mandated to contain inflation at CPI level within +/-2% of 4% target. This key reform has the potential to transform the trajectory of inflation and interest rates in India. The positive rub-off on rupee can hardly be under-estimated as rupee’s annual attrition can abate meaningfully in the coming years with the material reduction in the relative inflationary gap with US. As some estimates suggest, the annual depreciation in rupee can potentially fall from current 6%+ level (appx) to sub-3% level (In reality, it happens in a dis-orderly fashion, not in smooth manner year after year) because of this structural change in the trajectory of inflation.
Moving on to the next, IBC undoubtedly will be one of the lasting legacy of this administration. It’s far reaching impact on the structural shape of the growth in the coming cycles has been least understood. One of the reasons why growth goes into huge grind (long drag) after every attempt to breach double-digit is because of humongous bad debt cycle that follows such high-growth cycle. With credit culture set for a massive clean-up on IBC’s extra-ordinary effectiveness in making promoters lot more wary to default (else they lose their business in the new IBC regime) and thus setting the stage for more secular and cleaner growth in the next cycle. In this context, it is important to highlight the latest stance of Ruia’s (Essar Steel) willingness to pay back the dues. This is a landmark event in the history of corporate defaults in India and one can expect more such positive surprises to come in future. This turnaround in borrowing and repayment culture is critical to break out into new growth orbit in the upcoming economic expansion.
Add to this, the long-term impact of improvised GST and increasing tax-to-GDP ratio on growing compliance, one can build a case for structural shift in India’s growth profile. It will not be a misplaced optimism to foresee a golden period ahead for India. Though, India had disappointed such optimists in the past, with these reforms, may be, time has come for India to disappoint the sceptics in a more convincing manner. Needless to say, India will offer exciting investment opportunities for stock-pickers in coming months and years. Watch out for interesting times!