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Business News/ Economy / Interview | Domestic demand, higher capex behind Indian economy's resilience post Covid: CFA Institute's S Ramachandran
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Interview | Domestic demand, higher capex behind Indian economy's resilience post Covid: CFA Institute's S Ramachandran

'As a major exporter of agri-commodities, India escaped the worst of double-digit inflation that plagued the rest of the world.'

India's growth forecasts are buttressed by capital spending on infrastructure, says Sivananth Ramachandran (Image: CFA Institute)Premium
India's growth forecasts are buttressed by capital spending on infrastructure, says Sivananth Ramachandran (Image: CFA Institute)

Domestic demand and capital expenditure were among the key factors that sustained India's economic growth despite the global headwinds, said Sivananth Ramachandran, Director of Capital Markets Policy, India at the US-based investment professionals' body CFA Institute. In an email interaction with Live Mint, Ramachandran points towards the country's "conducive environment" to attract global investments, the economic prospects vis-à-vis China and other Asia Pacific (APAC) nations, how India can leverage from advancements in artificial intelligence and whether its net-zero goals are aligned with the growth vision.

Edited excerpts from the interview.

The IMF has described India as a 'bright spot' amid tepid global growth, whereas, the World Bank has acknowledged its resilience amid the current global headwinds. Do you see this translating into India emerging as one of the biggest investment hubs?

In recent years, the global economy has been struggling with multiple challenges, including Covid-19, high inflation, and the Russia-Ukraine war. In contrast, the IMF’s GDP growth forecast for India for 2023 is 6.1%, and there could be a potential upside to these numbers as the first quarter FY24 growth rate was a robust 7.8%. The IMF also expects that India will become the third-largest economy by 2027-28, based on current projections. This is a conducive environment for India as an attractive destination for global investments, and it is reflected in robust inflows from global investors (both FPI and FDI) and elevated valuations for public markets in India.

The growth forecasts are buttressed by capital spending on infrastructure, with the central government’s capex increasing from 12% of total expenditure in 2017-18 to 22% in 2023-24, which can potentially crowd-in private investments. The government has also rolled out subsidies to take advantage of shifting global supply chains. Despite this thrust in manufacturing, it is notable that the services sector, particularly financial services, banking, and insurance, continues to be a major source of foreign direct investments (16%), ahead of computer software and hardware (15%), and telecom (6%) in 2022-23.

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In the APAC region, has India embarked on the journey to become more economically vibrant than China? If yes, what are the key reasons driving the change?

When it comes to growth, India has benefited from a few tailwinds. The supply chain shifts driven by the pandemic and geopolitical considerations have benefited many countries in APAC, including India. As a major exporter of agri-commodities, India escaped the worst of double-digit inflation that plagued the rest of the world. Since the pandemic, large domestic demand and increasing capital spending on productive assets have added resilience to the economy and helped the rupee outperform most of the APAC markets post-pandemic.

There are other enabling factors too. India is focusing on building world-class infrastructure in areas such as roads, airports, ports, and real estate to address gaps that have long held back its economy. For example, India had about 145,000 kilometres of national highways at the close of FY23, almost double the more than ~78,000 kilometres it had a decade earlier. The country is also a rich source of talent in data science and new technologies such as Artificial Intelligence-driven innovation. For example, most tech companies have huge development centres in India and India is also the top country among H1B visa holders and most of these are STEM graduates and professionals.

Large-scale global demographic trends will also alter societal structures and capital markets. Over the next 5–10 years, we expect the transitions with global population shifts as negative replacement rates are the norm for Western Europe, China, Japan, and other mature markets where aging populations strain retirement systems and social safety nets. India has already surpassed China as the world’s most populous country and, is favourably placed demographically vis-à-vis most markets.

India has drawn applause for making UPI an instrument of mass usage. Do you see others in APAC replicating India's move to use technology for financial inclusion? Also, do you think APAC countries could be seeking New Delhi's aid or collaboration for an India Stack-like model?

UPI has been a remarkable innovation and a great example of digital adoption at a mass scale. There are also other important initiatives, such as e-KYC, which was a key factor in reducing banks' costs of onboarding customers. In this context, the low cost of data, and a thriving venture capital industry that took advantage of the resulting vast consumer base, are important enablers.

However, the main enabler of digital adoption is trust. APAC in general, and India in particular, are enthusiastic adopters of digital finance. In our recent survey on central bank digital currencies (CBDCs), another digital finance innovation, the level of support for CBDCs among our Indian members was 66%, behind only China (70%), among all the markets surveyed.

Regardless of the trajectory of this innovation, there are huge opportunities for regional integration in payment systems, with the attendant efficiencies in cross-border payments. For example, Singapore’s PayNow has now been integrated with India’s UPI, with efforts underway in a few other markets.

While India has led in the digital transformation journey over the past decade, do you think the country is well-positioned to benefit from the advancements in artificial intelligence?

India has made significant progress on various large-scale and diverse initiatives on its journey towards digital transformation. While it is natural to extrapolate this success to encompass AI, there are important caveats. Leadership in AI depends on access to hardware (advanced semiconductors), and vast amounts of high-quality data to train AI models.

India has taken initial steps to develop a home-grown semiconductor ecosystem, but a skilled workforce and large, sustained investments are critical to benefiting from the advancements in AI. Lastly, India’s digital transformation has led to vast, uniquely identifiable data on financial transactions and other data for training AI models in various settings.

Do you think India's net-zero goals are well-aligned with its growth vision? How do you compare it with other economies in the APAC region?

India’s overall target to achieve net zero by 2070 reflects its development needs. India’s other climate goals, which include 500 GW of renewable-based power generation capacity by 2030, are aggressive.

Among some major APAC markets, China and Indonesia are aiming to reach net-zero emissions by 2060, Malaysia and Singapore by 2050, while the Philippines is the only major APAC market that has not committed to a net zero target. In general, while target-setting is important, implementation is equally, if not more, important. While public policy and spending will continue to drive much of the progress toward net zero, as government debt rises across the world, private capital also needs to play a significant role. The need is for blended finance models that combine private capital with public capital or guarantees can play a significant role in catalysing the finance needed for transitioning into a low-carbon economy.

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Published: 26 Sep 2023, 06:47 PM IST
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