India is standing at the cusp of a new growth cycle. There are many enablers that will set the tone for this growth. The biggest enablers, Government and its reform-oriented approach are the most important. These are very much in place. Let us take a look at what other data points are pointing in the direction.
Pointers which reveal India’s giant leap towards becoming a USD 5 trillion economy
Corporate Profit to GDP (%) is at a multi-year low
Source: Business Today. Numerator is PAT of BSE 500 companies
Corporate Profit to GDP ratio has been on a continuous slide since FY2008. This fall was mainly led by four sectors – PSU Banks, Oil and Gas, Metals and Telecom. PSU banks suffered due to rising NPAs, higher provisions, higher slippages and lower loan growth. Metals suffered due to wild swings in global commodity cycles. Telecom suffered due to declining profitability as numerous players were engaged in a suicidal cost cutting race which destroyed profitability and resulted in many players exiting the market.
One needs to note that consumption has risen as the new champion of growth in past few years. It has outpaced old-world and commodity-driven sectors such as metals and oil and gas. However, consumption is a scattered activity. A large number of giants that emerged over past few years which contributed to GDP did not contribute to BSE 500, which is the numerator in our metric. Large retail giants (Amazon, Flipkart), fintech companies (PayTM), aggregators (Ola, Uber), food delivery (Zomato, Swiggy) and numerous others are not listed. They generate significant employment, pay taxes and hence contribute handsomely to the GDP.
As more and more of these “new-world” businesses get listed, the Corporate Profit to GDP ratio will move higher.
High growth to offset Government Debt to GDP
India’s Debt to GDP is neither too high nor too low. It lies somewhere in the middle. Economists have been divided whether India’s debt level is comfortable or a matter of concern. However, India’s (high) growth is a safe hedge against the debt. India is expected to grow much faster than the rest of the world and hence we can sustain higher debt levels. During the Asian crisis of 1997, India’s debt to GDP ballooned from 67% to 83%, GDP growth was just 3.9%. Post that, we had several years of high growth and the metric came back to 66%.
The interest rate paid by India has been historically lower than India’s growth rate and hence we can rest assured that India will never default on its debt repayment. It has never defaulted in the past as well. Hence, we don’t see India’s debt-to-GDP ratio a being a concern.
Bank Credit to private sector as % of GDP at multi-year low
Credit given by banks to private sector has slowed down over past 4-5 years. This is because of two reasons:
- Lower demand for credit amidst an economic slowdown
- Banks have been reluctant to lend to corporates fearing defaults by clients
Owing to these reasons, bank credit as % of GDP has gone lower, despite adequate liquidity maintained by RBI. At the heat of the COVID crisis, banks were unwilling to lend to companies as most businesses were closed and overall demand in the economy was abysmally low. With recovery now in sight and things beginning to move on the ground, credit is expected to pick up.
GST collection (Rs. Bn.) highest ever
Source: Government Data
GST collections hit all-time high levels in December, 2020 and January, 2021 owing to following factors:
- Government has been going after tax evaders for the past few months. The jump in collections could be due to more people falling in line and complying. Nearly 1.6L Company registrations were cancelled in October 2020 and November 2020 which could have prompted many others to make timely GST payments.
- Closer monitoring against fake-billing, deep data analytics using data from multiple sources including GST, Income-tax and Customs IT systems and effective tax administration have also contributed to the steady increase in tax revenue over last few months
- Apart from the above, companies have pushed sales harder in the past few months and consumers have gradually started spending money.
Indian household exposure to equities is among lowest in the world
Source: Motilal Oswal
Despite having a very regulated stock market that has created wealth for decades together for those who have stayed invested long enough, Indians have not yet fully opened up to the concept of equity investing. Only 14% of Indian household savings are invested in equities, which is among the lowest in the world. This is due to perception of equities as instruments of “excitement” and “instant gratification” rather than “long term wealth creation”. The Indian market needs measures such as further deepening of the bond market. An overall development of all facets of markets – equity, derivatives and bonds is necessary to boost participation.
A reform–oriented Government with the guts and intent to take unpopular decisions
Ever since the Modi Government took charge in 2014, it has taken some bold decisions – on the economic and non-economic front. We shall take a look at only the economic decisions. We shall not get into the argument whether a decision was right or wrong; or how right or how wrong. We only wish to take a look at the positives of the decision. The point that we are trying to drive is that the Modi administration does not shy away from taking tough decisions.
Some of Modi administration’s unpopular decisions were:
The Goods and Services Tax is an indirect tax which replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. Goods and Service Tax (GST) is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. GST is a single domestic indirect tax law for the entire country. (Source: Wikipedia)
The Insolvency and Bankruptcy Code
IBC is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The bankruptcy code is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome (Source: cleartax.in)
Real Estate Regulatory Authority was formed to bring about transparency in the real estate sector. It aims to reduce project delays and mis-selling. At present, it is compulsory for all builders or developers to carry out RERA registration before they start a project. (Source: Economic Times)
The process was implemented in India in November, 2016 to withdraw all Rs. 500 and Rs. 1,000 banknotes. The Government claimed that this was intended to curtail the parallel (shadow) economy in India and reduce use of fake cash used to fund terrorism.
To conclude, India has got all the right ingredients to take off in a big way – market of nearly 1.3 billion consumers, growing income levels, young population, action-oriented Government that has an absolute majority to pass key Bills.
In our opinion, there shouldn’t be anything that to come in the way of India and its ascent towards becoming a USD 5 trillion economy. This will throw enormous opportunities at investors who are willing to be patient, not timid. Take correct calculated risks and wait for the story to mature. Your future generations will certain say, “This guy / girl had the guts to slug it out, which made my life much easier”. Money can’t buy happiness, but it can certainly facilitate it.
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