Mumbai: The Indian economy is in a goldilocks phase with strong growth and manageable macro stability risks, on track to achieve 6.5-7 per cent year on year growth between FY26-FY30 said Tanvee Gupta Jain, Chief India Economist at UBS.
At a media roundtable on "Post-Election Indian Economy: Mapping India's Growth Path, Jain said, India's potential growth could benefit from digitalisation adoption, increased services exports and
manufacturing push.” Speaking about the general election outcome on policy making, Jain said while political stability should help ensure continuity in policy agenda, there is a risk of populist bias in the third term (targeted towards lower- income strata) and change in economic policy dynamics with tougher reforms getting pushed further out.
Narendra Modi’s is facing the first test of coalition politics after losing his outright majority in the election with smaller coalition allies such as Nitish Kumar’s JDU, Chandrababu Naidu's TDP, Chirag Paaswan's LJP, and Eknah Shinde's Shiv Sena, emerging as powerful Kingmakers in the formation of the government. Modi’s BJP accounted for 240 seats compared to the 303 seats it won in 2019. BJP fell short of the 272 parliamentary majority mark, forcing it to rely on coalition partners to return to power. On Sunday was sworn in as the Prime Minister for the third consecutive time.
“We think implementation of tougher reforms including land reforms, a big boost to infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections amongst others will be challenging. Implementation of hard reforms will help India take it potential growth higher than 7 per cent,” said Jain.
However the government would continue to push supply-side reforms including boost to manufacturing, labour law implementation, skill development and creating employment opportunities (especially blue-collar jobs in low-skilled labour-intensive manufacturing)amongst others.
Even as India's growth remains resilient, there is an apparent dichotomy between household consumption growth (below trend since the pandemic) and real GDP growth (holding up well). India is seeing a K-shaped consumption recovery with affluent/premium segment demand seemingly doing well, and demand for entry-level and mass-market goods has remained muted post the pandemic.
This suggests that those at the lower end of the income pyramid, that were perhaps the most affected due to the pandemic, have still not seen their incomes recover to the level to regain their ability to spend. Limited fiscal support for vulnerable sections of society and weather anomalies affecting rural income have further amplified the gap. “To help broaden India's growth, we believe India needs a broad-based recovery in capex cycle as construction is the largest generator of jobs outside of agriculture.”
“We would watch out for (1) upcoming union budget announcement. Our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias. The higher-than-expected RBI dividend transfer to the government (additional 0.3 per cent of GDP in FY25) would create fiscal leeway to increase populist spending to support consumption for lower income strata (cash transfers, higher rural spending, income tax rationalisation, affordable housing etc) while continuing its thrust to boost public capex,” said Jain.
