Indian economy has made it to the launchpad. It still needs a spark

Yet, even if some investors and sell-side analysts are touting India as “the best structural growth opportunity in emerging markets, if not the world,” it is worth looking beyond the hype to the real reasons for some of these surging indicators, to judge whether India’s growth is assured in coming years.

Consider the Indian equity markets. There are excellent, long-term reasons why they have been on an upward trend. But it is always unwise to deduce the real health of an economy from the level of its headline stock index. It sometimes says more about the choices available to capital than anything else.

That’s certainly the case in India. We are in the middle of a years-long shift to the greater financialisation of savings. As Indian households gain easier access to formal finance, they will put less of their wealth into gold or real estate and more into financial assets, whether bank deposits or stocks. Even when foreigners sell Indian equities — as they did heavily at the beginning of this year — the domestic appetite for shares seems inexhaustible, driven by this bedrock change in household preferences.

Equities are also island of calm, competence and transparency in the Indian economy. The securities regulator is largely independent and efficient; minority shareholders’ rights are legally protected better than in many advanced economies; and you can find large companies in most sectors with trustworthy balance sheets and professional management. Money, including global finance, piles into Indian stocks partly because it so much easier than taking a punt on, say, building a factory.

But it’s only when more and more investors want to create real factories rather than juice up financial assets that India’s economy will really take off. This is part of the reason that, when judged against earnings, Indian shares are among the most expensive in the world. The macro figures underline the basic problem: Although corporate earnings have increased from a multi-decade low a few years ago, profits as a percentage of GDP are still about three percentage points lower than they were in the boom years of the 2000s.

Growth, meanwhile, was higher than expected partly because it’s only now that the post-pandemic recovery is really kicking in — and partly because government subsidies declined sharply. Thanks to how national accounts are calculated, that meant while actual value added seems to have slowed a little, the GDP numbers jumped up.

That’s a symptom of one underlying problem: It is still government actions that are pushing growth up or down, rather than the choices made by India’s private sector. Private investment in India has simply never recovered to the levels it reached during India’s 2000s growth spurt. While big public infrastructure rollouts have soaked up Indians’ savings, the private spending they were supposed to “crowd in” hasn’t yet materialised.

A decent platform has been built for the Indian economy to achieve liftoff. But the India hype, in contrast, doesn’t have firm foundations. The next government still has a lot to do if the Indian economy is to enter a real high-growth phase. Watch corporate earnings and private investment over the next few years to see if it’s going to happen.

Mihir Sharma is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg