India has graduated to a higher position in the comity of nations in recent days. Global financial firm Morgan Stanley has upgraded India as an investment destination while downgrading China. This comes on the heels of leading credit rating agency, Fitch Ratings actually downgrading the credit rating of the world’s biggest economy, the United States. From the perspective of an emerging economy that has been struggling for decades to ensure that foreign rating agencies are fair and accurate in their assessments, it is amusing to see the reaction of the US Treasury Secretary Janet Yellen. Her comment that the agency’s “flawed assessment” was based on outdated data echoes similar complaints made over the years by government spokespersons here in India.
The fact is, the reasons for changes in sovereign investment grading are based on opaque criteria that may not adequately reflect the reality on the ground. It is heartening that Ms Yellen has been forced to confront issues regarding the credibility of such agencies. Similarly, China has been faced with an investment downgrade by Morgan Stanley.
In contrast, India is being viewed as the next big thing on the horizon. The Morgan Stanley upgrade has highlighted the same aspects that other external agencies like the International Monetary Fund (IMF) and the World Bank have been saying for the past six months about the Indian economy. It has talked about the potential of the Indian economy to grow at 6.5 per cent annually over the next decade while the Chinese economy may only be expanding by 3.9 per cent per annum over the same period. It also places its bets on India being at the beginning of a long growth cycle while the Asian titan seems to be at the fag end of a similar growth phase.
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In any case, these positive forecasts reflect the fact that India’s economy has been resilient, much to the surprise of many observers, despite disruptions posed by the pandemic and then the Ukraine conflict to world growth. While India too faced contraction in growth during 2020-21 like many other countries, it managed to bounce back with a 9.1 per cent increase in 2021-22 and 7 per cent in 2022-23. With growth expected to range around 6.5 per cent in the current fiscal, this has made it the fastest growing major economy in the world, for the second year in a row.
The question is, how has this been managed when it has had to contend with external headwinds that have crippled many other economies. The answer lies partly with policies to support depressed trade and industry during the pandemic that were formulated with a moderate rather than expansive approach. There were few hand-outs to industry despite criticism, even from myself, that the credit relief package for small and medium enterprises was inadequate for their revival. Instead, free foodgrains were provided to those at the bottom of the pyramid to ward off hardship faced by the weakest segments of society. On the industrial front, the focus was kept on the pipeline of infrastructure projects to stimulate growth in the medium and long term.
Another factor has been the pro-active role played by the central bank which aggressively hiked interest rates when inflationary pressures mounted last year. Government policies also had to be tailored to deal with the disruption of supply chains after the Ukraine war erupted in February last year. In the face of international criticism over the impact on world food availability, there was no option to contain rising food grain prices but to extend bans on export of wheat last year and on rice this year.
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The big issue of higher energy prices that made inflation spiral out of control in Europe was also kept under control by freezing retail prices of petroleum products for most of 2022. Though oil prices are now nominally deregulated, the reality is that public sector oil companies take their cue from administrative ministries on this sensitive issue.
And finally, a major reason for the sustained economic recovery of the past two years has been continued growth in the farm sector. This has helped in pushing up overall demand. The availability of rising demand with a large domestic market has given a boost to the process of industrial revival. The thrust on infrastructure growth and increasing public sector capital expenditure has also contributed ensuring that the manufacturing sector has been recording positive growth. The latest industrial data is showing signs of sluggishness, however, while inflation has shown a spurt lately. Both could be areas of concern for the rest of the year.
Yet there is no doubt that the combination of industry-friendly policies like the production-linked incentive schemes along with the drive on infrastructure has made the country an increasingly attractive investment destination. This in turn has brought a steady flow of funds from foreign institutional investors into the country’s stock markets. FDI inflows are also growing especially in high technology areas like semiconductors. At the same time, an emerging economy like India needs to grow even faster to pull out of poverty. GDP per capita remains at a low of USD 2500 compared to USD 12700 for China. India thus has a long way to go, though the outlook is brighter than it has been for a long time.
(Sushma Ramachandran is a senior business journalist.)
Note: Views expressed are the author’s own.