India's race for higher growth: A local buffalo race holds the lessons

A new star seems to have arisen in India. Sprinting alongside a pair of buffaloes, construction worker Mr Srinivasa Gowda wowed an audience during a local sporting event, when he covered a distance of 142.5 m in the paddy fields of rural Karnataka in just 13.62 seconds. Equivalent to 100 m in 9.55 seconds, one can claim that this is better than Usain Bolt’s world record of 9.58 seconds. Does this make Mr Gowda the fastest man on earth?

Cynics urge us to pause for a moment. It is possible that some of Mr Gowda’s speed was generated by the raging buffaloes running alongside. Others say that the slushy fields may have instead slowed him down. The truth is that in order to make any comparison, Mr Gowda will need to be timed and tested in an environment where professional athletes compete. That alone will resolve the issue.

All of this seems to oddly resonate with India’s growth prospects. Last year was rough. GDP growth slid, as everything that could go wrong, did go wrong. The year 2020 could be better. The buffaloes running alongside the country’s economy could provide a helping hand in more ways than one.

One, if the rain during monsoon is normal, the rural economy could improve. It would cement the gains that the sector has garnered over the last few months as food prices have risen. Two, the positive supply shock from oil prices sliding down to $53/barrel, from $61/barrel a year ago, could also support growth. Three, India's wobbly shadow banks seem to have stabilised as the availability of funds, both local and international, have improved. The costs that non-banking financial companies borrow at are beginning to normalise after skyrocketing in 2019.  

Four, on the policy front, the Budget has come and gone, with no major disruption. If the equity market performance is an indicator, the Budget did not seem to be as disruptive this year as it was perceived to be last year. Finally, following the large but conventional lending rate cuts last year, the central bank has forayed into unconventional methods, to try to get the markets to mirror the moves. In the recent policy meeting on February 6, it offered to inject cash through one- and three-year funding operations to try to keep short-term borrowing costs low. It also loosened regulations on loans made to small businesses, real estate and the auto sector.

Kambala jockey Mr Srinivas Gowda created a storm recently by covering 100 metres in 9.55 seconds

Of course, the deterrents to growth should also be acknowledged. Just as the slushy paddy fields could have slowed Mr Gowda, the fallout from the current coronavirus outbreak could impact India, both directly and indirectly. Around 14 per cent of India’s imports come from China, and are spread out across investment, industrial and consumer goods. Persistent supply disruption could hurt India’s economic recovery. And a slowdown in global growth may harm the country’s exports.

Considering both the positives and negatives, we think India’s economy will revive gently, from an expected sub-5 per cent growth clip in December 2019 to about 6 per cent by December 2020.  

But will the recovery last? And is it good enough? If one argues that the brisk rise in the manufacturing indices over the last few months reflects inventory re-stocking, one must also note that this can be a one-off, unless demand rises to use up the new supply. Also, 6 per cent growth pales, when put alongside the 8 per cent growth achieved just a few years ago. How can India get to a higher growth trajectory, sustainably?

This is where India’s economy faces the real test. External positives can be short-lived. Is the domestic economy structurally strong enough to support higher growth?

In previous research, we have argued that nationwide balance sheets are stretched. Companies have too much debt, banks are battling a large pile of bad loans, the finances of shadow banks remain lopsided, households may not want to take on too much more debt when wage growth is low, and the government debt and deficit situation is tight. The policy priority is clear. The balance sheet clean-up needs to be expedited. That alone can push India sustainably to a high-growth trajectory.  

Thankfully, the country is working with the right ingredients. For example, the new bankruptcy code can lead to a faster resolution of bad assets. The new coal policy can help untangle some stalled investment projects. The government's ambitious disinvestment plans can help improve government finances. The success of these important reforms, however, will depend on execution. The latter can be tardy in India.

If Mr Gowda wants to prove himself among other athletes, he will have to perform by himself, on a professional track. If India wants to get on a higher growth path sustainably, it will have to build its internal potential. If it cleans up its impaired balance sheets with much-needed reforms, it can win the race.
The author is chief India economist, HSBC Securities and Capital Markets (India) Pvt Ltd

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