The Indian economy could grow only moderately in the next few years due to the lack of visibility on a capital expenditure-led recovery and the need of households to re-build their savings which could dent consumption growth, according to Nikhil Gupta, chief economist at Motilal Oswal Financial Services.
"What is most important is household income growth. I don't have any reason to believe that it is going to grow at a much faster pace over the next few years. And, as savings have fallen to such a low level, I hope savings are rebuilt. If that happens, a combination of modest growth in personal income and rebuilding of savings implies that consumption growth may remain weak or modest over the next few years," Gupta told Moneycontrol in an interview.
"If we do not see the investment-to-GDP ratio going up to 34-35 percent, then that means it is very much likely that we may remain at 5-6 percent real growth for the next few years."
India's GDP is expected to grow 7 percent in 2022-23, according to the statistics ministry's first advance estimate, while the Reserve Bank of India (RBI) has forecast next year's growth at 6.4 percent. However, Gupta expects India's growth to slow to 5.2 percent in 2023-24.
Consumption slowdown
Gupta said household consumption growth, which has been "extremely strong" in the past few quarters, will come off in the coming quarters, with signs already visible in the sales and volumes growth of some retail companies.
More crucial is the reason consumption growth has been solid in recent times. According to Gupta, households have been eating into their savings and increased their leverage, which has maintained consumption growth.
Except during the pandemic-hit year of 2020-21, the statistics ministry's data shows private final consumption expenditure has increased by an average 7 percent every year starting 2013-14.
In the first half of the current financial year, Gupta estimates that household financial savings were as low as 4 percent of GDP as against 7-8 percent in the pre-COVID years and about 7.5 percent in 2021-22.
"When savings fall to such a level in a young country like ours, I find it difficult to talk about structural factors, as savings are one of the major factors affecting economic growth. If you do not have savings, it is challenging to have investment and growth that is sustainable," Gupta said.
A consumption-led growth model, where consumption rises not on account of strong income growth but a drawdown of savings worries Gupta.
"I hope that it does not continue and from next year onwards we see savings pick up, which means consumption growth will have to moderate," he said.
Capex concerns
The Centre has pressed hard on the investment pedal in recent years and has set itself a record capex target of Rs 10 lakh crore in 2023-24. However, Gupta said what matters is capex on the whole and not spending by any one segment.
While the central government's capex has surged, that of the states has been weak, with Gupta pointing out the former's capex exceeded that of states for the first time in 2021-22.
Then there is the matter of capex by central public sector enterprises (CPSEs), which has fallen in recent years on account of the Centre taking it on to its own books. To get a clearer picture, one also must make adjustments for certain other 'capital' expenditure, such as that of the Food Corporation of India and long-term interest-free loans from the Centre to states, among others.
According to Gupta, once these adjustments are made, capex by the Centre plus CPSE for 2023-24 is 3.8 percent of GDP. While this is higher than the revised estimate of 3.5 percent of GDP for 2022-23, it is lower than roughly 4 percent in the pre-COVID years.
"There is no shying away from the fact that the Centre's has gone up dramatically. But aggregate central government capex has not increased in the past 2-3 years vis-à-vis pre-COVID years," Gupta said.
When it comes to the private sector, Gupta said improved profitability and the performance of listed companies in the past 2-3 years had led to the narrative that they would drive capex. However, the condition of unlisted companies – which is a far bigger segment – has deteriorated and would drive capex lower.
"We had written a note sometime in August 2021 wherein we were of the view that capex is not going to see that kind of recovery which is being discounted. We continue to believe that," Gupta said. "Investment-to-GDP ratio has been in the range of 30-32 percent for the last many years. We expect it to remain in the same range for 2023-24 as well. So I don't see a capex-led growth."
Another rate hike?
On the monetary policy front, the unexpectedly high January Consumer Price Index (CPI) inflation print of 6.52 percent has sparked expectations of another repo rate hike by the RBI in April.
Gupta saw this possibility before the inflation data was released on February 13, although the probability of a rate hike in April "has definitely gone up".
The RBI’s Monetary Policy Committee (MPC) increased the repo rate by 25 basis points to 6.5 percent on February 8. One basis point is one-hundredth of a percentage point.
According to Gupta, the MPC is moving "step by step" given the uncertainty globally.
The MPC's decision to continue to focus on withdrawal of accommodation has also created some uncertainty, but Gupta prefers to look at what is being done rather than what is said.
"There are a lot of words and different people have different interpretations of these words. Earlier, it used to be much simpler. Now it has become much more complicated. But rather than going into these words and reading between the lines, it's better to look at what the RBI should have done, what were our expectations, and what has actually been done," he said.
