Five ways India’s next growth cycle is different

By Amish Mehta 

In the three decades leading up to the Covid-19 pandemic, India’s gross domestic product (GDP) grew at an annual average of 6.2 percent. The recovery after the pandemic was swift, and the country has grown faster than 7 percent in the past three fiscals.

This fiscal growth is foreseen at 7.6 percent, above the consensus estimates of the past.

But moderation looms. High interest rates and a gradual reduction in the fiscal impulse to growth — because the government has to pursue fiscal consolidation — would slow GDP growth to 6.8 percent next fiscal.

Still good enough to keep the fastest-growing large economy crown.

By the end of this decade, we expect India’s GDP to have clocked an average 6.7 percent growth annually.

The upturn underway is on a stronger footing and is taking place in an entirely different geopolitical setting than before.

The world is moving away from hyper-globalisation to tariff wars and industrial policies that promote domestic production. Focus has been sharper on resilience than efficiency after the pandemic.

Five dimensions will differentiate India’s medium-term growth trajectory:

One, High Base And Compounding

Growth in the medium-term will be over a high base and will yield compounding benefits. The size of the Indian economy is expected to rise 1.9 times to $6.7 trillion by fiscal 2031 from $3.6 trillion this fiscal.

Fiscal 2031 will mark the year when India becomes an upper middle-income country with per capita income rising to ~$4,500.

That ascent from the lower middle-income strata now will improve the quality of consumption with increasing demand for discretionary goods.

Take the example of automobiles, one of the aspirational durables and closely tracked consumption items. We find that car density in a country rises with per capita income, with most gains being made in the middle-income segment.

Two, Rebound And ‘Servicification’ Of Manufacturing

The balance of manufacturing and services growth will improve as more efficient logistics, green transition, friendshoring — or the global supply chain diversification — and domestic policy thrust will support manufacturing activity.

We expect manufacturing and services to grow 9.1 percent and 6.9 percent, respectively, between fiscals 2025 and 2031.

Despite some growth catch-up by manufacturing, services will remain the dominant driver as the share of manufacturing and services will be at 20 percent and 55 percent, respectively, by fiscal 2031.

There is ample opportunity for both manufacturing and services to cater to domestic and global demand.

To boot, the boundaries between manufacturing and services are getting blurred due to the gradual ‘servicification’ of manufacturing. So, it is not an either-or debate, but on how an optimal combination of the two can deliver balanced growth.

Three, Igniting A Different Capex Revival

While a gradual pick-up in private capital expenditure will make investment growth more broad-based, new and emerging sectors such as electric vehicles (EVs), semiconductors and electronics will dominate incremental investments, driven by market dynamics and global supply-chain diversification.

With an expected Rs 5-7 lakh crore capex, these sectors will likely contribute 20 percent to the overall industrial investment in the next four fiscals.

The government’s industrial policy — especially the Production Linked Incentive (PLI) scheme — will play a crucial role in fast-forwarding industrial capex across conventional and emerging sectors.

Four, Leveraging Productivity Gains

The medium-term growth will be driven by increasing contribution of productivity.

This will come from synergising physical and digital connectivity and the continuing push to economic and process reforms — a confluence of factors we haven’t seen in the past.

The infrastructure build-up spearheaded by the government, particularly in the transport sector is decongesting, improving connectivity and reducing turnaround times.

This has already improved India’s logistics ranking by six places to 38 in 2023. The digital infrastructure build-up pioneered by India is leading to rising digital payments and resultant efficiencies, government is saving on its subsidy delivery and India stack has served as a platform for innovations.

The concurrent development of digital and physical infrastructure such as roads has reduced waiting times on the toll plazas and increased cost savings through lowered energy requirements.

Five, Balancing Decarbonisation Goals

The risks from climate change are at our doorstep with 2023 logging the highest temperatures in recorded history.

Dealing with it will pose a unique, if not insurmountable, challenge for India as it is among the regions most vulnerable to climate change.

‘Decarbonising while growing fast’ is an added challenge that India faces that the ‘Asian tigers’ and more recently China did not have to contend with.

India is building infrastructure and cranking up its manufacturing mojo at once, both of which are carbon-intensive activities.

Balancing the trade-off between growth and energy transition will test the dexterity of policymakers.

Chalking out an exceptional growth path while negotiating the new normal is thus the biggest medium-term ask.

Amish Mehta is Managing Director & CEO, CRISIL Limited. Views are personal, and do not represent the stand of this publication.