The International Monetary Fund (IMF) has projected India’s GDP to grow by 9% for 2022 and 7% in 2023.
As per other global agencies, such as the World Bank and Asian Development Bank, India is likely to emerge as the fastest growing major economy in the world between 2021-2023, writes Ayush Abhijeet, adviser to the Ashoka India Equity Investment Trust.
In this context, it is worthwhile to examine the factors supporting near term growth and how policy support is emerging as an enabler.
Earnings at an inflexion point
A defining feature of India’s recovery has been the sharp upswing in the earnings trajectory. In FY21, fiscal ending March, when India’s GDP declined by 7.5%, the earnings for the benchmark Nifty index grew by 14%, a rare feat in the emerging markets.
This robust earnings performance in the face of economic challenges reflects the strong resilience of Indian corporates.
It is true that higher commodity prices helped earnings of resource-based companies but underlying trends across sectors are reassuring of a broad-based pick up. Recent research from the IMF suggests that policy support provided to firms in 2020 was effective in mitigating the liquidity impact of the Covid shock.
Market share consolidation in favour of stronger, larger players has been a steady phenomenon during the pandemic.
Companies continued to focus on enhancing their distribution reach, particularly in rural areas and through e-commerce investments.
For the banking sector too, the worst phase of asset quality is behind with credit costs easing over the last year. Meanwhile, even as global growth has supported a revival in earnings for export driven sectors, Indian IT services companies have benefited from the accelerated digital adoption cycle globally.
As per consensus estimates, the earnings growth for 2022 and 2023 is likely to be 32% and 17% for the benchmark Nifty universe which follows a near stagnation over the last decade.
It implies that India will emerge as not the only the fastest growing economy but will also be the market with the highest earnings growth between 2021-2023.
Policy support a key factor too
The government continues to support the economy through supply side measures. In fact, through the pandemic, the focus was on infrastructure spending including roads, railways and water and sanitation.
India’s policy response during the pandemic was unique in that it had an emphasis on supply side reforms, including deregulation in many sectors, rather than relying on demand side measures.
The recently announced FY23 budget should be seen as a continuation of the FY22 budget which was universally hailed as a pro-growth and pro-reforms budget.
While the budget signals policy continuity with thrust on capital expenditure, there is a particular emphasis on strengthening multi-modal logistics, building digital ecosystems and sustainable energy infrastructure.
Two other announcements in the budget merit attention. The first is the support towards driving innovation and improving the resilience of the Indian economy.
For instance, the budget supports opportunities in sunrise sectors such as Geospatial Systems and Drones, Semiconductors, and building a strong ecosystem for 5G networks. These measures will help build India’s competency in industrial edge technology.
The second area is the thrust on Green Energy which builds on the recent top-down policy momentum towards achieving environmental goals. In the 2021 United Nations Climate Change Conference, commonly known as COP-26, India pledged to achieve net-zero carbon emissions by 2070.
In addition to this net-zero target, India also stated that it will fulfil 50% of its energy requirements from renewable sources by 2030, thus reducing the carbon intensity of the economy by 45% from its 2005 levels. The recently introduced Green Hydrogen Policy also aims to aid in meeting climate change goals.
This article was written for International Adviser by Ayush Abhijeet, adviser to the Ashoka India Equity Investment Trust.
