After the election, there is a chance that policy will focus on higher growth: Barclays

After India's elections in April and May 2024, there is a possibility that policies will target higher growth without losing hard-won macroeconomic stability, says Barclays FICC (Fixed Income, Currencies, and Commodities) research report.

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“India is expected to remain the fastest growing major economy for some time to come. However, after the general election, policies could trend towards even faster economic growth. While 6 percent growth would increase India's global importance, the targeted 8 percent growth could see the country overtake China as the largest contributor to global growth.

“If India is to become the world’s largest driver of GDP growth, greater investment is required. Over the last decade, intangible investments have driven the investment cycle. But given rising capacity utilization and increased public investment, a return to fixed investment could be imminent,” said the report, “India: A Breakout Moment.”

The report highlights that the government has prioritized macroeconomic stability ahead of the 2024 general election, with a focus on inflation rather than a spend-and-growth approach. After the elections, the new government could aim to bring GDP growth back to the levels of the last 2000s without sacrificing macroeconomic stability.

While the upcoming general election has been widely cited as a risk factor for the economic outlook, Barclays' economic research team noted that its recent work shows increasingly firm electoral mandates and no major disagreements over economic policy and growth within the Indian polity. Reducing the risk of a dramatic change in policy direction.

“However, this does not necessarily preclude a change in policy direction between stability and growth. Once the electoral cycle is over and a majority government is adopted, there may be a temptation to switch to higher growth. This will of course have an impact on the macroeconomic stability that has been achieved in recent years,” said Rahul Bajoria, Head of EM Asia (ex China) Economics, Barclays Investment Bank.

A higher growth trajectory not only poses risks to the current account deficit and resulting financing needs, but if achieved through fiscal stimulus could come at the expense of fiscal consolidation and higher inflation, which could boost volatility in economic variables, said the team Barclays, which also included research analysts Shreya Sodhani and Amruta Ghare.

“Therefore, we believe that the best way to pursue higher growth is to strengthen certain macroeconomic variables such as savings, maintain high levels of productivity and make better use of India's fundamental advantages: clean balance sheets, private sector dynamism, a geopolitical backdrop , which favors the development of productive capacity, and a young population in an aging world. “We assume that these could be achieved through defined quantitative targets,” say the analysts.

The risk of a key man

The report highlighted that an often-cited risk is that India's macroeconomic progress is linked to its current leadership. The current government has demonstrated fiscal restraint and prudence during difficult macroeconomic periods, particularly during the pandemic and ongoing conflicts.

“This has led to investors in India discussing key man risk; that the system itself does not lend itself to caution and that, beyond current leadership, it may revert to its “old ways.” “This is a legitimate risk to be concerned about, but we will not know to what extent it is true or not until it actually becomes true,” the report said.

A “reset” could be coming for India

Analysts were of the view that a “reset” could be imminent for India. After years of mediocre economic growth compared to their own past, in the shadow of a sluggish global economy, a banking sector riddled with NPAs, corporate deleveraging and persistently high inflation, they believe the economy could now be at a turning point.

The analysts stressed that many of these factors holding back India's growth trajectory have reversed and the double balance sheet problem has become an asset rather than a crisis.

The more proactive push to increase production, with friends shoring and a clean corporate and financial balance

Leaves, better control of inflation, a sophisticated digital footprint and major infrastructure expansion are expected to provide additional stimulus to the economy, the research team said. Therefore, they expect India's real growth to remain high.

But the real challenge is getting the economy to grow faster, say by around 8 percent – ​​last achieved in the 2005-2010 calendar year – without endangering macro stability.

According to the report, reforms implemented in recent years in tax policy, industrial policy, quality of public spending, digital infrastructure and foreign policy are expected to pay off in a post-COVID landscape.

Also Read: Cancellation of electoral bonds will lead to more transparency: Amartya Sen

“India's economic outperformance enters its fourth year, accompanied by improving macroeconomic stability. But becoming the world's biggest growth driver requires economic discipline and continued reform,” said the Barclays team.

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