Post-elections, there is a possibility that policy tilts towards targeting higher growth: Barclays

Following elections in India in April-May 2024, there is a possibility that policy tilts towards targeting higher growth while not losing hard-earned macro stability, according to the Barclays FICC (fixed income, currencies, and commodities) research report.

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“India is set to remain the fastest-growing major economy for some time. However, post-general elections, policy may tilt towards even faster economic expansion. While 6 per cent growth would raise India’s global relevance, targeting 8 per cent could see it overtake China as the biggest contributor to global growth.

“If India is to become the world’s biggest driver of GDP growth, it will need higher investment. Through much of the past decade, intangible investment has driven the investment cycle. But with capacity utilisation rising and public investment elevated, a tilt back to fixed-asset investment might be in the offing,” per the report “India: A Breakout Moment.”

The report underscored that in the lead up to the 2024 general elections, the government has prioritised macro stability with a focus on inflation as opposed to a spend-and-grow approach. After the elections, the new government may aim to return GDP growth to levels last seen in the 2000s without losing macro stability.

While the impending general election has been widely flagged as a risk factor in terms of the economic outlook, Barclays’ economic research team observed that its recent work shows increasingly firm electoral mandates and no major disagreement over economic policy on growth within the polity in India, reducing the risk of any dramatic shift in policy direction.

“However, this does not necessarily preclude a change in policy orientation between stability and growth. Once the election cycle is over, assuming a majority government, there could be a temptation to tilt towards higher growth. This will obviously have implications for the macroeconomic stability achieved in recent years,” said Rahul Bajoria, Head of EM Asia (ex China) Economics, Barclays Investment Bank.

A higher growth trajectory not only raises risks for the current account deficit and subsequent funding requirements, but if achieved through fiscal pump-priming, it may come at the cost of fiscal consolidation and higher inflation, which could spur volatility in economic variables, said the Barclays’ team, which also included research analysts’ Shreya Sodhani and Amruta Ghare.

“As such, we think the best way to aim for higher growth would be to strengthen certain macroeconomic variables, such as savings, maintain high levels of productivity, and making better use of India’s fundamental advantages: clean balance sheets, private-sector dynamism, a geopolitical backdrop that favours manufacturing capacity build-up, and a young population in an ageing world. We think these could be achieved by means of defined quantitative targets,” opined the analysts.

Key man risk

The report highlighted that an often-cited risk is the association of India’s macro-progress with its current leadership. The current administration has shown fiscal restraint and prudence during difficult macro periods, especially during the pandemic and ongoing conflicts.

“This has led to investors discussing key-man risk in India; that the system itself does not lend itself to prudence, and that beyond the current leadership, it may revert back to its “old ways.” This is a fair risk to be worried about, but we would not know to what extent it is true or not till it actually plays out,” the report said.

‘Reset’ may be coming for India

The analysts felt that a ‘reset’ may be coming for India. After years of middling economic growth relative to its own past, in the shadow of a sluggish world economy, a banking sector laden with NPAs, corporate deleveraging, and persistently high inflation, they believe the economy could now be at a turning point.

The analysts emphasised that many of these factors holding back India’s growth trajectory have reversed, and the twin balance sheet issue has become an advantage rather than a crisis.

The more proactive push to increase manufacturing, with friend-shoring, clean corporate and financial balance

sheets, better control over inflation, a sophisticated digital footprint, and a large infrastructure buildout should provide additional stimulus to the economy, the research team said. As such, they expect India’s growth, in real terms, to remain high.

The real challenge, however, is to make the economy grow faster, say around 8 per cent — last achieved in 2005–10 (calendar year terms) — without compromising macro stability.

Reforms taken over the past few years, across tax policy, industrial policies, quality of public spending, digital infrastructure, and foreign policy, are likely to pay dividends in a post-COVID landscape, per the report.

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“India’s economic outperformance is entering its fourth year, accompanied by enhanced macro stability. But the path to becoming the world’s biggest contributor to growth needs economic discipline and continued reforms,” opined the Barclays team.

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