India's moment: Time to unshackle and drive domestic demand

The October 2023 India Development Update given by the World Bank shows that despite global challenges, India grew at 7.2 percent, twice the average growth rate of emerging economies. Image: Shutterstock

Team India displayed a phenomenal performance in the 2023 World Cup. Batters aced while bowlers menaced. Superlative performances prompted Ravi Shastri to comment, "India will have to wait for another three World Cups if they don't win it this time… The way they are playing, this is probably their best chance." Indian economy is in a similar sweet spot. The global view that the next decade belongs to India must be realised. President Boeing India, Salil Gupte, commented in a panel discussion, "…this is a unique moment …people have been telling me – Someday! Someday, India will be one of the top markets for aviation, and someday, India will have the capability for top-quality manufacturing and be part of the global supply chain. It is crystal clear that in this moment … someday has arrived, someday has arrived …this is India's moment…".

Similar enthusiasm is echoed by heads of many manufacturing majors like ABB, Mercedes Benz and Foxconn. This panel discussion was held almost a year back, and India's admirers list keeps growing. A few days back, the MD of Intel India, Santhosh Vishwanathan, expressed buoyant sentiments regarding digital transformation and 'Make in India' initiatives. Dr Sanjeev Sanyal, Principal Economic Advisor to the Government of India, says, "Growth is not inevitable. Growth is earned." The October 2023 India Development Update given by the World Bank shows that despite global challenges, India grew at 7.2 percent, twice the average growth rate of emerging economies. The growth needs to be sustained despite the growing challenges.

Mixed Signals of Global Demand

High inflation in the US has eroded the purchasing power of the US Dollar by 17 percent[1]. Credit card debt has soared to $1 trillion for the first time. The credit card debt and the interest rate burden on that debt are at record high. Fortunately, employment figures are high as the factories kept chugging, producing weapons, ammunition, and other aid materials for Ukraine and Israel. That's probably why consumers' income rose, and despite the high inflation, the US economy in its Q3 of 2023 recorded a 4.9 percent real GDP growth rate annually. This is astounding.

The US was expected to fall into recession. In its April 2023 report, Bloomberg said there was a 65 percent probability for the US to get into a recession. The probability for the UK has been stated as 75 percent. For other large economies like Germany, Italy, Canada, France, South Africa, New Zealand and Australia, it is said to be in the range of 40-70 percent. In June, it was reported that Eurozone had slipped into a mild recession as the economy contracted by 0.1 percent in the previous two quarters[2]. The recession seems to be hardening as the third quarter also saw a decline of 0.1 percent[3]. It is further expected to slip as HCOB's PMI fell to 46.5 in October from September's 47.2, the lowest since Nov 2020.

The recession in the EU implies lowered demand for Indian exports of goods and services. Growing tension in the Middle East adds to India's woes regarding meeting its export targets. On the one hand, weak global demand reduces orders for our factories, but on the other, it benefits India through falling commodity prices and the availability of cheaper credit. Crude oil prices have started falling on cues of weak global demand. The Gaza crisis does indicate supply disruption, but OPEC may not wish to risk that. "Investors are more focused on slow demand in the United States and China while worries over the potential supply disruptions from the Israel-Hamas conflict have somewhat receded." [4]

Recall that Russian oil also found its way to the market despite the war and ban. Foreign investors have begun pulling huge funds from exchange-traded funds tracking Saudi Arabia, Qatar, the UAE and Israel. The war is harming the business-friendly narrative built by these countries. As the Middle East looks to build infrastructure to develop non-petroleum sources of revenue, it may not risk oil supply disruption from this region. Moreover, investors pulling money out of the Middle East, China and the EU implies increased availability of funds for Indian companies.

Also read: China stocks at lower valuations but India growth more convincing: Stefan Hofer

Stimulating domestic demand

While the US and EU engage in wars in Ukraine and Russia, while China clears its own cobwebs and international disdain, India needs to look inwards, bolstering domestic consumption and compensating for the demand loss emanating from the receding global demand. Free rations under PMKGAY for the next five years will generate surpluses and enhance discretionary spending. This helps the farming community, too, as more procurement happens at MSP or higher prices, strengthening rural demand.

Rising tech spending and focus on MSMEs are expected to generate significant domestic demand. Last month, Nirmala Sitharaman at Kautilya Conclave informed that India is looking to reduce its debt. Despite being appreciative of India's economic fundamentals, rating agencies like Fitch and Moody's cannot give us better ratings, citing the increase in combined debt of States and the Centre during Covid. Lowered debt enables better ratings, thus reducing the cost of capital for Indian companies. Some economists expect the cost of capital to rise for Indian companies.

The Open Market Operations announced by RBI in its October monetary policy leading to increasing interest rates is a short-term phenomenon. In the long run, interest rates will fall. Inflation has already come down to 4.87 percent. Moreover, the surplus global capital fleeing the Middle East and China puts downward pressure on the cost of capital. Enhanced confidence of foreign companies regarding business in India; Rising rural demand; Cheap cost of capital, coupled with substantially lower prices of commodities like coal, crude, copper, zinc, steel, and so on, offers a once-in-a-lifetime opportunity to create a sustainable competitive advantage over other countries. 

Dr. V. P. Singh, Director, PGDM & Professor - Managerial Economics & Statistics, Great Lakes Institute of Management, Gurgaon