IMA India Session Highlights Medium-Term View of Indian Economy

At a recent joint online session of the India CEO, CFO, CHRO and CMO Forums, Dr Pronab Sen, Chairman of the Standing Committee on Statistics and former Chief Statistician of India, provided a medium-term view of the Indian economy. He offered a broad view of the challenges and opportunities that lie ahead, and on some critical policy imperatives.

The Current Picture

The RBI’s most recent OBICUS survey indicates an industry-wide capacity utilisation rate of 73%, suggesting potential for new investments as this ratio approaches the critical threshold level of 80%. However, amidst positive economic indicators, concerns linger regarding the completeness and accuracy of available data and its implications for future growth trajectories. Specifically, the very small gap between the projected rates of nominal (8.5%) and real (7.3%) GDP growth for the current fiscal and a major variance between CPI and WPI inflation has major implications for pricing dynamics and policy responses.

Recent fluctuations in CPI and WPI inflation have raised concerns about India’s macro-economic stability. While the CPI surged to 9% before stabilising at just below 5%, reflecting the effects of the RBI’s restrictive monetary policy, the WPI has been highly erratic. It surged to 14% before sharply plummeting below -8%. This divergence between the two indices suggests underlying complexities in inflation dynamics that necessitate careful analysis. Identifying the root causes of this and devising effective response strategies is crucial to ensuring longer-term economic stability and growth.

Analysing Future GDP Growth

The projected nominal GDP growth rate of 10.5% for FY25 hinges on several assumptions, notably a stable GDP deflator of ~4.5%. However, this is questionable, particularly given the large CPI-WPI divergence. While the CPI, reflecting consumer goods prices, remains relatively stable, the WPI, encompassing a broader spectrum of goods and services, is displaying significant volatility. This volatility, in turn, is attributable to global economic fluctuations and commodity price shocks, including the sharp Covid-led downturn, which was followed by a gradual recovery. Although the world economy remains in mostly good health, uncertainties persist, particularly around China’s economic trajectory and geopolitical tensions, both of which pose potential risks to future growth prospects.

Meanwhile, India’s quarterly GDP growth data rely unduly on the financial results of listed companies. This may lead to an incomplete assessment of the country’s economic performance given that it overlooks the substantial contributions of (unlisted) MSMEs. A recent deceleration in the growth of large corporations, coupled with a moderation in consumption, raises concerns about the sustainability of overall growth. Without robust investment initiatives and favourable employment prospects, it becomes difficult to sustain growth at the current rate. Thus, a cautious approach to future economic projections and policy decisions is warranted, with a focus on addressing underlying structural issues and fostering a conducive environment for inclusive growth across all sectors of the economy.

Key Drivers of Long-term Growth

Sustaining 6-6.5% growth rates through 2030 will require re-evaluating India’s economic policies, particularly on MSMEs. Despite being historically undervalued, MSMEs have played a pivotal role in shielding the economy from global shocks. This was exemplified by their resilience during the Asian Financial Crisis and in their leading role in India’s recovery following the dot-com bust. However, the pandemic reversed this story, with MSMEs bearing the brunt of the downturn while corporate India surged ahead. Today, the path to an MSME revival remains unclear, hindered by limited access to capital and government schemes that are primarily focused on sustaining existing enterprises rather than fostering new ones.

Harnessing the potential of MSMEs will demand a paradigm shift – one that prioritises entrepreneurship, fosters a conducive ecosystem for MSME growth and recognises the inherent resilience of such companies. By recalibrating investment strategies more towards MSMEs, economic growth can be amplified. This is essential, given the technology gap between large corporations and MSMEs, which impacts the productivity of capital. If instead, India aspires to a corporate-led growth trajectory of 7-7.5%, it will need to drive the investment rate back up to 36-40%. Plainly, fostering an inclusive economic environment that nurtures MSMEs alongside corporate giants is paramount for India’s sustained prosperity.

The contents of this paper are based on discussions of the India CEO, CFO, CHRO and CMO Forums with Dr Pronab Sen, Chairman, Standing Committee of Statistics, in February 2024. The views expressed may not be those of IMA India.

This paper is available on the Knowledge Centre of the IMA website. Additionally, a podcast version is available here and can be heard on the podcast platform of your choice.