In today’s Finshots, we explore some of the factors that could be driving India’s snowball effect.

The Story

India is going to be the fastest-growing major economy in the world this year. We’re a bright spot in a world that’s struggling to deal with inflation and faltering growth. And Borge Brende, the President of the World Economic Forum (WEF) thinks it’ll only get better. A couple of days ago, he likened India’s growth trajectory to the snowball effect.

What’s that, you ask?

Okay, it’s not an obscure economic theory. But it’s an analogy that can be pretty much applied to everything. Imagine a snowball that’s rolling down a big slope. It might start off as a small snowball but it keeps picking up more snow along the way and it gets bigger and bigger. It has momentum on its side and it grows exponentially. Now imagine this happening to an economy. As the production of goods and services, investments and disposable incomes rise, the economy grows and gathers momentum. There’s no stopping this snowball!

And it’s not just Brende who thinks this is India’s time to shine. McKinsey’s CEO Bob Sternfels believes it’s not just India’s decade but India’s century. Morgan Stanley estimates we’ll become the third-largest economy by 2027.

So, what does everyone think is driving the snowball effect in India, you ask?

For starters, there’s the population. Nearly 70% of the population falls in the working age group of 15–64 years. And the outcome of that is that there will be fewer ‘dependent’ people in the country as a proportion of this working-age population. That also means that we’ll have a larger part of the population who can spend and drive consumption growth in the economy. Also, with the proliferation of nuclear families and then the children of these families migrating to big cities for work, it could spur urban consumption. You could see demand for housing and vehicles increase too.

Then there’s the government’s focus on spending money on infrastructure. As Chris Wood who writes the Greed & Fear note for Jefferies said last week:

"One obvious point here is the transformation of physical infrastructure, where the fiscal deficit has in recent years been primarily spent on investing in infrastructure and not on entitlements. The result is that the huge deficiencies in infrastructure, so visible when GREED & FEAR first visited the country on a business trip back in 1996, have now been largely addressed."

Of course, that’s anecdotal evidence. But the hard numbers speak for themselves — we’re actually spending more on things that can have a multiplier effect by generating more jobs. We used to spend just 0.3% of our GDP on roads and railways and now that’s up to over 1.5%. That’s a figure that The Economist called ‘eye-watering’ because it’s around 2 times what America and most of Europe are spending.

The end result is projects like the dedicated freight rail corridors which, for instance, can cut the time taken for transporting goods from Delhi to Mumbai by 50%.

But it’s not just building infrastructure for the sake of it. You see, quite often, you might have noticed a new road being laid. And then you’d see roads being dug up to lay pipelines a few weeks later. And a few months after that, you’ll see a few folks digging it up again maybe to lay telecom cables. That’s certainly a waste of resources.

Now that’s just an example at the micro level. But similar things can happen in the process of building large-scale infrastructure too. And that the government has launched programmes such as the Gati Shakti Mission to reduce such inefficiencies. Try and get different departments to coordinate with each other so that capital is resourcefully used. In fact, 102 critical projects under the Gati Shakti master plan worth nearly $8 billion are to be completed by 2024.

And in the midst of all this, the socialist roots are being catered to as well. Not by extensive reliance on subsidies, which investors always place a red flag on, but by improving the distribution of welfare subsidies. You see, back in 2012, then Finance Minister Pranab Mukherjee had said, “I lose my sleep not when I look at the volume of quantum of subsidy, but because it is not reaching to the poor and needy and targetted group.” Well, it’s a much better situation now because the leakages are being plugged with the help of the Aadhar card and the Direct Benefit Transfer. Together, this identifies the beneficiaries and deposits the money directly into their bank accounts. And apparently, we’ve saved $27 billion by preventing leaks in the system this way.

This can help uplift those who need the subsidies the most. And they could even contribute further to India’s consumption story.

And what do you think happens when companies see all this change taking place?

They ramp up their investments too. Slowly but surely, they start announcing and building new projects. For instance, the new project announcements from private companies have jumped from ₹5 lakh crores in FY21 to a massive ₹26 lakh crores in FY23. Foreign companies like Apple decide to set up manufacturing units here instead of in China.

That’s the snowball effect kicking in.

Now remember, this isn’t a comprehensive list of everything that contributes to the snowball effect. But just some of the more visible ones. There are other things such as how the electrification of the 600,000 villages in India and the increase in broadband connections from 61 million to 816 million will give a boost to productivity too. But we’ll stop here now.

And this brings us to the final question — what about the hurdles in this plan?

Well, we wrote about this a couple of weeks ago. A young population is not a guarantee of rising consumption. For that, we need to generate high-quality jobs too. And that has been something of a struggle for the country — the International Labour Organization (ILO) says that the unemployment rate for those with either a bachelor’s degree or higher is a staggering 15% in India.

And even though we’re spending on infrastructure, we might need more. A whole lot more. In fact, the government thinks we need to splurge at least $1.5 trillion in this next decade. But the problem is that all that money might just be to make up deficits — or whatever we failed to build and upgrade in the past. It may not necessarily drive big growth.

There’s also the matter that despite everyone talking about this being India’s moment, foreign direct investments (FDI) have dropped by nearly 22% in FY23 compared to the previous year. And even though private investments from companies are being announced, we need to see how it translates into ground reality. The government also doesn’t think it’s enough. They’ve asked companies to pull up their socks multiple times in the past.

And finally, our growth is driven by domestic consumption and that trend cannot go on forever. Since a large part of the economy is still heavily dependent on agriculture for jobs, climate change and issues like heat and water stress could dampen rural incomes which in turn will affect domestic consumption.

So yeah, while we have a lot going for us, there are some battles we need to fight. Let’s keep our fingers crossed.

Until next time…

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