Analysis: India's post-Covid spending boom drives two-speed economy

India is set to be the world's fastest growing major economy in the year ahead, as a post-pandemic retail boom and recent bank balance-sheet repairs lure new investment, fueling hot demand for everything from cars to televisions, coal and airliners.

The world's fifth-largest economy is expected grow 6% in the fiscal year ending March 31, 2024, according to a survey by the Indian central bank this month.

While slower than the current fiscal year's projected 6.8% growth, the outlook contrasts with bleaker 2023 projections in the United States, Europe and most noticeably China, a major Asian economic rival where a recent surge in Covid infections is expected to hobble activity next year.

Importantly, conditions are better than not just the crippling slump during India's devastating Covid surge last year but also the anemic growth of the debt-saddled last decade.

The more upbeat mood is shoring up spending and investment in India, although the recovery is expected to be an uneven one, benefiting the urban and domestic sectors more than struggling rural and export-oriented parts of the economy.

"If India does things right, we can see significant foreign inflows in the next one to two years," said Sridhar Sivaram, chief investment officer at Enam Holdings, a private equity group.

He is most bullish on Indian banks, which are experiencing a "Cinderella moment" – a phrase popularized by billionaire banker Uday Kotak – due to strong demand for loans and falling defaults.

India's weight in the MSCI emerging market index has already increased from 8% in 2019 to 16% as of October 2022, Sivaram said.

Foreign portfolio investors sold a net $18 billion this year but became buyers in November and December, with a third of last month's inflows going to financial stocks.

Long-term foreign direct investors invested $22 billion in India between April and October 2022, on par with the previous year. According to government data, computer software, services, trade, non-conventional energy and chemicals accounted for more than half of the revenue through September this year.

Irregular rebound

Economic activity picked up after a third wave of Covid infections in 2021 was less severe than expected and led to the lifting of most Covid-related restrictions, reducing pent-up demand for homes, cars and consumer goods in cities.

Pradeep Bakshi, chief executive of consumer electronics company Voltas, said sales were driven by strong orders and easier financing options, such as buy-now-pay-later schemes, which reduce upfront payments for consumers.

According to gross domestic product data, demand for services such as hospitality, travel and leisure rose 7.4% in the September quarter compared to the same period in 2019, before the Covid crisis hit.

"We are back in expansion mode with redoubled vigor after a period where we didn't know if we would survive," said Anjan Chatterjee, managing director of Specialty Restaurants, which operates restaurants across the country.

Overall, private consumption rose 7.8% in the September quarter from pre-Covid-19 levels in 2019, while a sharp increase in government spending pushed fixed capital formation, a sign of investment activity, up 13.5% from 2019. as shown by GDP data.

RETURN OF INVESTMENTS

India's reopening is one of the reasons for strong demand for electricity and coal, prompting the government to increase gas imports, while more companies seek bank credit as they add capacity.

Air India, for example, is considering landmark orders for 500 jetliners worth tens of billions of dollars from Airbus and Boeing, Reuters reported this month.

However, not all indicators indicate the same level of economic power.

Unemployment remains high at an average of 7.4% in the 12 months to November, compared with 6.3% in 2018-19 and 4.7% in 2017-18, according to the Center for Monitoring the Indian Economy.

High inflation, which the central bank estimates will average 6.7% in 2022-2023, has also weighed on spending in rural areas, where wage growth is lagging behind urban areas and disposable incomes are lower.

Production of non-durable goods, which include snacks and soaps and are sensitive to changes in rural demand, fell by more than 4% in April-October and by 13% in October alone, leading to a 5% drop in overall output this month.

Slowing global demand is also beginning to weigh on exports of goods such as textiles.

But broader optimism remains buoyed by the prospect of fresh private investment after a decade in which Indian corporations were over-indebted and banks saddled with bad loans, making businesses reluctant to spend.

Sivaram of Enam Holdings said order announcements have picked up, although it usually takes about two years for "the capex cycle to materialize into earnings."

There is also hope that global corporations will diversify their supply chains away from China, which will benefit India.

"In the chemical sector, we have seen this China plus one strategy work quite well and we are positive about some companies in this sector," Sivaram said.