India’s potential growth may have slowed down by over one percentage point due to the longer-than-expected disruption caused by COVID-19 and a modest policy response so far, UBS Securities said in a report.
“We estimate India's potential growth to have slowed to 6% (from 7.1% YoY estimated in 2017) due to longer-than-expected disruption caused by the pandemic, balance-sheet concerns faced by economic agents (especially the financial sector and households) and only a modest policy response so far,” said Tanvee Gupta Jain, economist, UBS Securities India Pvt. Ltd. “This implies difficult economic challenges for many years to come.”
For example, near-term challenges (reduced household income and hit to corporate bottom lines) may inflict longer-lasting damage to household consumption and fixed investment.
“The government could also face debt-sustainability concerns if the depth and the duration of the crisis worsen,” she added.
However, UBS Securities asserts that India can still achieve 7% plus growth over the next 3-5 years through policy changes.
“Decomposing India's growth into inputs of production and total factor productivity (TFP), we believe rising rates of investments and productivity are key for higher sustainable growth,” UBS Securities said.
“The policy bias will need to change from repair to growth. Unlike earlier near-term growth disruptive reforms (GST, anti-corruption agenda, banking system clean-up), the focus needs to be on reforms that are growth-supportive (for instance, recent corporate tax rate cut),” it said.
“Our analysis suggests that in an upside scenario if India integrates into global supply chains along with productivity-enhancing structural reforms, it could return to potential growth of 7% plus through a combination of higher investment growth (12% YoY) and TFP (4%),” it added.
A likely downside scenario (policy mis-steps and weak global growth), associated with low TFP (2.5%) and sluggish investment growth (4%YoY), could take growth to 4.5-5.0%, the report said.
Stating that India was emerging as one of the favoured destinations [to attract FDI] as companies look to relocate from China, UBS Securities said Indian government should optimise this ‘golden opportunity’ by announcing “a credible fiscal stimulus immediately to reduce the near-term downside risks to growth.”
“UBS Evidence Lab CFO Surveys suggest high and increased intention of moving away from China by export-oriented companies. 60% in the China CFO survey, 85% in the North Asia survey and 86% in the US CFO survey said they had moved or plan to move part of their production (average 30%) out of China. These surveys point to early evidence that India is emerging as one of the favoured destinations...,” it said.
It added the focus should be on integrating India into the global supply chain.
It said the biggest challenge before India would be its ability to create ample employment opportunities for the rising working-age population.
Of the incremental 12 million rise in India's working-age population every year, 5 million workers enter the labour force, though less than half find a job.
“Over 45% of the workforce now is employed (unproductively) in agriculture and may therefore also be in need of more productive jobs. The economic consequence entails stagnant disposable income amidst potentially weaker job creation trends (quantity, quality or both),” it said.
“We believe India needs to grow by at least 8% YoY annually just to absorb incremental labour force with a focus on mobilisation of resources towards manufacturing, exports and capex,” it added.
