India Story - Prof. KV Subramanian.pdf

Disseminating the India Story
Prof. K V Subramanian
Professor (Indian School of Business)
& Ex Chief Economic Adviser, GOI
1
©K. V. Subramanian

Indiaoffers foreign investors highestopportunityin
FY23 as GDP growth in USD projectedto be highest
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
India
China
Indonesia
United
Kingdom
Brazil
Japan
Germany
Canada
Sri
Lanka
Singapore
Portugal
Spain
Greece
Italy
United
States
France
South
Africa
Australia
Mexico
GDP Growth in $ estimated by IMF - FY23
Source: World Economic Outlook, Apr-2022
©K. V. Subramanian 2

Indiaoffers foreign investors highestopportunitytill
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0% India
China
Indonesia
United
Kingdom
Brazil
Sri
Lanka
Singapore
Portugal
Japan
Spain
Canada
Germany
Australia
Mexico
Greece
France
Italy
United
States
South
Africa
GDP Growth in $ estimated by IMF - till FY27 (CAGR)

Indian economy this decade: Key Narratives
❑India will be the fastest growing economy in the world this
decade with 7-8% growth (in real terms) per annum.
❑Four questions key to understand this prognosis
➢Impact of Covid on India’s economic fundamentals?
➢What is the economic vision that India is pursuing? Which sectors/
areas is India emphasizing?
➢Was the growth decline before the pandemic structural?
➢What are the risks and challenges?
❑To separate facts from narratives, this presentation draws
on rigorous research published in GoI’s Economic Surveys:
➢2018-19:Strategic blueprint for $5 trillion economy
➢2019-20: Ethical wealth creation, which has been India’s DNA, key
to India’s future economic progress
➢2020-21:Post-Covid Economic Path

India’s macro-economic
performance during Covid

Macroeconomic fundamentals more resilient in once-
in-a-century COVID-19 crisis than in GFC (2008)
Macroeconomic Indicators
2009-10
GFC
2020-21
Covid
CPI inflation (%) 11.5 5.6
Fiscal Deficit as % of peer economies* 331 138
Current Account Balance as % of GDP -4.8 0.9
∆Revenue Expenditure (Central Govt.) 27% 5.9%
∆Capital Expenditure (Central Govt.) -4.8% 13.1%
∆Gross Fixed Capital Formation (% of GDP) -4.5% 2.4%
INR Depreciation 56% 0.06%
External Debt as % of GDP 20.7 21.1
Forex Reserves (USD billion) 252 579
∆Govt Bond Yields 10-year 4.0% 0.9%
FDI ($ billion) 8.3 80.1
FPI ($ billion) -9.9 36.2
6
* Emerging & developing Asia as defined in World Economic Outlook
As every country expands fiscally in a crisis, India’s Fiscal deficit must be compared to peers

RBI Bulletin May2022 shows India’s externaldebt
performancemuchbetter duringGreatLockdown
(GLD) in Covid thanin Global Financial Crisis(GFC)

India’s better macroeconomic fundamentalsin
COVID-19 due to clarityof policyand courage of
conviction to be differentfrom the rest
❑Covid-19 was a huge shock to supply
➢Supply chain disruptions
➢When engines of the economy are shut via lockdowns,they do not rev
back to full speed immediately => supply shortage
❑Advanced economies primarily undertook Demand-side
measures and are facing 4x inflation
➢Emerging economies, where supply-sidefrictions are far more salient
than in advanced economies, are facing 60-70% inflation in some cases
❑If India had followed the same policy as in GFC or as other
economies did in Covid, India would have had 18-20% inflation
❑India is not facing this eventuality because of India’s policy
©K. V. Subramanian
8

To understand impact of Covid-19 on GDP
and prices, consider case of laissez faire, i.e.
no policy intervention
Prices
Output
Post-Covid no
intervention
Pre-Covid
Pre-Covid
Post-Covid w/o any
Aggregate
Supply (Pre
Covid)
Aggregate
Demand (Pre
Covid)
Q0
Q1
Absent any intervention, GDP ↓ much greater (Q1 << Q0).
But inflation not much (P1 ≈ P0) as both demand & supply ↓
©K. V. Subramanian
9

Only demand-side intervention => inflation ↑
sharply, as is happening in other countries (400%
↑ in US vs. 4% in India vis-à-vis average) & in
India during GFC (2-digit inflation for 1.5 yrs)
Prices
Output
Q3
Agg Demand
(Post Covid
w/o intervn)
Aggregate
Supply (Post
Covid)
Aggregate
Demand
(Post Demand
Stimulus)
P3
P2
Q2
Only demand stimulus => GDP ↓ is lower (Post-covid is Q3 not Q2).
But inflation ↑ (P3 >> P2) as demand ↑ but supply does not.
©K. V. Subramanian
10

India’s COVID-19 policy response included both demand
& supply-side measures to boost output & control inflation
Prices
Output
Q2
(DD
measures)
Agg Demand
(Post Covid w/o
intervn)
Agg Supply
(Post Covid w/o
intervn)
Agg Demand
(Due to
Demand
measures)
P3
P2,
P4
(DD & SS
side measures)
Agg Supply
(Due to Supply
measures)
Post-Covid no
intervention
Q4
Q3
Demand+supply measures => GDP ↓ much lower (Post-covid is Q4 not Q3
or Q2). And inflation ↑ lower (P4 < P3 >> P2).
©K. V. Subramanian
11

India’s external debtas a % of GDP is amongthe
lowest
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
400.0%
450.0%
Singapore
United
Kingdom
Greece
France
Spain
Portugal
Germany
Italy
Canada
Japan
Australia
United
States
Sri
Lanka
Mexico
South
Africa
Brazil
Indonesia
India
China
Gross External Debt/ GDP - Q42021
Source: Quarterly External Debt Statistics (QEDS), World Bank
& World Economic Outlook

India’s short-termexternal debtas a % of GDP is
the lowest
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0% Singapore
United
Kingdom
France
Greece
Spain
Portugal
Germany
Japan
Italy
Canada
United
States
Australia
Sri
Lanka
China
South
Africa
Brazil
Indonesia
Mexico
India
Short-term External debt/ GDP - Q42021

India’s short-termexternal debtas a % of GDP
beinglowest among other countriesis consistent
with proportionof short-termdebt beingv low
Source: Status paper on Public Debt, Ministry of Finance (April 2022)

Indian General Government’s external debt as a %
of GDP is amongthe lowest
0.0%
30.0%
60.0%
90.0%
120.0%
150.0%
Greece
Portugal
France
Spain
Italy
Japan
Sri
Lanka
United
Kingdom
Germany
United
States
Canada
South
Africa
Australia
Indonesia
Mexico
Brazil
India
China
Singapore
General Govt External Debt/ GDP - Q42021

India’s short-termexternal debtdenominated in
foreign currencyas a % of GDP is low
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Germany Sri Lanka South
Africa
Mexico India United
States
China
Short-term foreign currency External debt/ GDP - Q42021
& World Economic Outlook. Data on short-term foreign
currency externaldebt not availablefor several countries
©K. V. Subramanian
16

DoubleDigit Inflation AND CurrentAccountDeficit
> 1.8% of GDP makes India’s macro vulnerable
©K. V. Subramanian
17
'91
'93
'95
'97 '99
'01
'03
'05
'08
'10
'12
'14
'16
'18
'20
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2.0 4.0 6.0 8.0 10.0 12.0 14.0
Current
Account
Balance
Inflation
Macro Vulnerability chart from 1990-91 to 2019-20
Bubble Size denotes Fiscal Deficit (FD)
In several non-crisis years, FD has been
> FD in crisis years. So, FD seems to
matter less than inflation & CAD
Crisis years
Source: IMF, RBI

Macro-vulnerabilityindicator = FD*CAD tracks
crises in Indiaverywell. Based on this indicator,
likelihood of crisisverylow for India now
Crisis Years
Source: IMF, RBI

Looking forward

Indiaoffers foreign investors highestopportunityin
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
India
China
Indonesia
United
Kingdom
Brazil
Japan
Germany
Canada
Sri
Lanka
Singapore
Portugal
Spain
Greece
Italy
United
States
France
South
Africa
Australia
Mexico
GDP Growth in $ estimated FY23

Indiaoffers foreign investors highestopportunitytill
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0% India
China
Indonesia
United
Kingdom
Brazil
Sri
Lanka
Singapore
Portugal
Japan
Spain
Canada
Germany
Australia
Mexico
Greece
France
Italy
United
States
South
Africa
GDP Growth in $ estimated till FY27 (CAGR)

1.Growth
+ Efficient
Welfare
2.Ethical
Wealth
Creation
India’s
New
Economic
Vision
3.Virtuous
Cycle
• Exclusive focus on growth to
generate resource for welfare
• Efficient welfare to not only reduce
inequality but also to enhance
aggregate demand
• Separation enables comparative
advantage & enhances efficiency
• Wealth as boon
not bane
• Enabling &
empowering of
private sector
(deliberate
emphasis on
privatization &
asset
monetization)
• Virtuous cycle
originating from
private investment
• Public capex to
“crowd in” private
investment
• Supply-side
reforms to
accelerate private
investment
Source: Economic Surveys of
2018-19, 2019-20, 2020-21
©K. V. Subramanian

Looking forward:
1. Macro-economic Hysteresis
from Covid unlikely

Corporate Income and Profit was above Pre-
Pandemic Level in Sep-2021 itself
Source: Extractedfrom CMIE
24
8
10
12
14
16
18
20
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jun/19
Sep/19
Dec/19
Mar/20
Jun/20
Sep/20
Dec/20
Mar/21
Jun/21
Sep/21
Rs.
Lakh
Crore
Rs.
Lakh
Crore
Gross Profit Total Income (RHS)
©K. V. Subramanian

No erosion of
productive
capacity =>
Formal sector
jobs came back
strongly
Effective
Corporate tax
rate slashed from
35% to 26%*
Scale back of
operations
during pandemic
leading to cost
saving
Low interest rate
regime helping
companies de-
leverage
* Tax cut contributed to 19%
of top-line of 4000 listed
companies (Report by SBI)
Formal Sector in India has escaped macro-
economic hysteresis

Informal sector is more impacted… but hysteresis less
likely because of high labour-intensity
❑Formal sector relies far more on capital (factories etc.) =>
Decrease capital to take care of debt obligations => Negative
shocks to earnings impact productive capacity
❑So, hysteresis was far more likely in the formal sector
❑Informal sector relies much more on labour than capital… even
the small proportion of capital is not from formal sources
❑Labour supply in the informal sector is more elastic => As
economy recovers, labour supply returns and earnings come back
❑Unlike formal sector, hysteresis from loss of productive capacity
is lower in informal sector
❑Informality inhibits growth in good times but cushions in bad
times

Looking forward:
2. Financial Sector Healthier
(Recall financial sector
contributed to slowdown
before Covid)

Financial sector reforms strengthening Banking
Sector
❑Profitability: Public sector banks have returned
back to profitability and their asset quality has
improved.
❑Bad bank to become operational from this month
(Jun-2022). Will free up management bandwidth for
new credit.
❑Privatization of public sector banks a major move
28
©K. V. Subramanian

Looking forward:
3. Growth in
Manufacturing

Emphasis on Manufacturing for job creation
& aggregate demand
❑Jobs in the formal sector => increases aggregate consumption
❑Manufacturing crucial for jobs in formal sector
❑PLI scheme for 13 sectors (winner picking + incentive for growth)
❑Changes in MSME definitions to enable economies of scale & avoid
problem of dwarfism that hinders job creation
❑Labour law reforms to enable job creation in manufacturing
❑Infrastructure investment in Railways & Roads => ↓ logistics costs
❑Infrastructure investment in power => cost of production ↓ in mfg
❑Fin sector reforms to enable capital (DFI, ARC, privatisation of PSBs,
74% insurance FDI)
❑Move people from agriculture to manufacturing
30
©K. V. Subramanian

India's manufacturing GVA growth showing
encouraging signs
-1%
4%
9%
14%
2005-10 2010-15 2015-19
Growth in manufacturing GVA (%
CAGR)
India China
-15%
5%
25%
Growth in merchandise exports (%
CAGR)
India China
0%
10%
20%
30%
Growth in manufactured goods exports
(% CAGR)
India China
-10%
0%
10%
20%
Iron
&
steel
Pharma
Chemicals
Auto
prod
Transport
eq
Machinery
Textile
Clothing
Others
Sectoral Patterns (% CAGR,
FY15-19)
India China
Source: UNSTATS,WTO, Axis Capital Research

Improvement in Manufacturing stemming
from addressing systemic problems:
1. Strengthening of physical infrastructure
0
20
40
60
80
100
120
140
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
2015-16
2017-18
2019-20
2021-22
(till…
National highway length (000
kms)
Source: MoRTH, NHAI
(18)
(16)
(14)
(12)
(10)
(8)
(6)
(4)
(2)
0
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
2020-21
Peak energy deficit

Improvement in Manufacturing stemming from
addressing systemic problems: 2. Significant
improvement in logistics efficiency
300
350
500
0
0.5
1
1.5
2
2.5
3
3.5
0
100
200
300
400
500
600
2011 2016 2021
Kms
Average distance covered by trucks/day
National highways no. of lanes (RHS) 8.1
7.7
4.2 4 4.2
4.6
5.3
4.64.3
3.83.9
3.53.5
2.92.7
2.1
2.6
0
1
2
3
4
5
6
7
8
9
FY91
FY96
FY01
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
H1F…
India major ports turnaround time
(days)

Improvement in Manufacturing stemming
from addressing systemic problems:
3. Competitive tax rates
25% 24%
20% 20%
17% 17% 16%
0%
5%
10%
15%
20%
25%
30%
Indonesia Malaysia Vietnam Thailand India Singapore China
India: Tax rate for manufacturingcos competitivevs. other
markets

Pre-pandemic Economy:
Why did India’s growth
decline before Covid?

Whydo you needto understand the reasonfor
India’s growth declinebefore Covid?
❑If investors think that the growth decline was “structural”, i.e.
due to economic fundamentals being weak, they will doubt the
prognosis for the future
❑Only if investors believe that the reason for the growth decline
before Covid was not structural, will they believe that India has
moved on from those problems.

Why did GrowthdeclinebeforeCovid?
Overhang
from problems
originating in
the financial
sector is much
longer than
when
problems
originate in
real sector
Overhang
from Crony
lending till
2013 led to
sharp
deceleration in
growth of
credit: 9% p.a.
during 2015-
21 vs. 21.9%
p.a. from
2005-14.
First Investment
got impacted.
Lower
investment
impacted
growth, which in
turn impacted
consumption.
Virtuous cycle
slowed down
sharply.

Why did GrowthdeclinebeforeCovid?
❑Reference: Pages 20-27, Vol-II, Eco Survey 2019-20
❑Key point #1: When problems originate in the financial sector,
the overhang is much longer than when problems originate in
the real sector
➢Point made by academic research (Mian and Sufi, Journal of Economic
Perspectives, 2018) and
➢Policy research (International Monetary Fund, 2017, “Household Debt
And Financial Stability”, Ch. 2 in Global Financial Stability Report)
➢As an example, compare impact of Global Financial Crisis (GFC) vs. Covid
crisis. Growth bounced back immediately after Covid but the overhang
lasted several years after GFC.
❑Key point #2: Huge crony lending till 2013 => credit growth
declined from 2014 (credit growth of 9% p.a. during 2015-21 vs.
21.9% p.a. from 2005-14) => private investment declined sharply
slowing down “virtuous cycle”
❑Evidence in following slides
©K. V. Subramanian
38

Investment in year t has maximum impact on
GDP growth four years later (see blue line)
©K. V. Subramanian
39
Source:
Economic
Survey
2019-20

Boom & bust in Corporate Credit: 2013 is focal
point
40%
42%
44%
46%
48%
50%
52%
54%
56%
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Share of Corporate Loans in Non-Food Credit
©K. V. Subramanian
40
Source:
Economic
Survey
2019-20

Private Investment affected by sharp
decline in Credit
Firm
Year
Corporate Credit (↑ or ↓
in debt/assets): (1)
Investment (↑ or ↓ in
Fixed Assets): (2)
Relationship
between (1) & (2)
2011 2006-10 2011-15 Not Significant
2012 2007-11 2012-16 Not Significant
2013 2008-12 2013-17 Significant & -ve
2014 2009-13 2014-18 Not Significant
2015 2010-14 2015-19 Not Significant
Credit growth: 2015-21: 9% p.a.
2005-14: 21.9% p.a.
Fact shown in Table : ↑ in Corporate Credit from 2008-12 correlates
–vely with corporate investment from 2013-17. No correlation for
change in corporate credit in any of the other 5-year periods.
Inference: The boom-bust in corporate credit – with 2013 as the
focal point – led to the sharp decline in private investment.
Source:
Economic
Survey
2019-20

Lagged effect of declining investment on
GDP growth
Investment
Economic
Growth
Consumption
Recall that investment has sharpest effect on growth 4 years later.
So, decline in investment from 2013 had impact on growth from 2017.
Cascading effects on consumption then through the “virtuous cycle.”
Source:
Economic
Survey
2019-20

Pre-pandemic Economy:
India’s employment
situation before Covid?

Whyam I providingthe employment numbers?
❑Employment is an area where the uninformed/ misinformed
narratives have been endemic.
❑Data – from Periodic Labour Force Survey conducted by NSSO –
clearly separates the facts from the narrative
❑Employment data clearly reveal that quality of jobs has
improved
➢↑ in Salaried/ regular wage workersby 40 mn in 2019-20 vs 2011-12,
especially among females
➢↑ in formal employment by 20.6 mn
❑Side-point: NSSO Survey data is trustworthy, CMIE is not. See:
➢https://www.epw.in/journal/2021/52/commentary/how-reliable-labour-market-data-india.html
➢https://economictimes.indiatimes.com/jobs/a-tale-of-two-methodologies-which-dataset-captures-
the-real-picture-of-the-labour-market/articleshow/81234857.cms
➢https://economictimes.indiatimes.com/opinion/et-commentary/view-its-time-for-cmie-to-rethink-
how-they-determine-labour-market-data/articleshow/83554205.cms

Regularwage/salariedemployees ↑ 46.9%(= 41 mn) in
2019-20vis-à-vis2011-12, 82%↑ amongfemales
45
Source: Periodic Labour Force Survey
2011-12 2019-20 2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Total 88.3 129.7 41.4 46.9%
Urban 59.1 84.3 25.2 42.6%
Rural 29.3 45.4 16.1 54.9%
Male 71.0 98.0 27.0 38.0%
Female 17.4 31.7 14.3 82.1%
Regular Wage/Salaried Employee (millions)
©K. V. Subramanian

Self-employed↑ by 36.5 mn in 2019-20 vis-à-vis
2011-12 = growth of 14.9%
46
2011-12 2019-20 2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Total 245.4 281.9 36.5 14.9%
Urban 57.3 65.2 7.9 13.8%
Rural 188.1 216.6 28.5 15.2%
Male 173.3 200.2 26.9 15.5%
Female 72.0 81.7 9.7 13.4%
Self-employed (millions)
©K. V. Subramanian

Casuallabour↓ by 15.5mn in 2019-20vis-à-vis 2011-12
with↓ by 18.6 mnin rural areas contributingmost
47
2011-12 2019-20 2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Total 139.2 123.7 -15.5 -11.2%
Urban 20.2 23.2 3.0 14.7%
Rural 119.1 100.5 -18.6 -15.6%
Male 99.5 89.5 -10.0 -10.0%
Female 39.7 34.1 -5.6 -14.1%
Casual labourer (millions)
©K. V. Subramanian

Formal Employment↑ by 20.6 mn in 2019-20 vis-
à-vis 2011-12 = growth of 53.8%
48
2011-12 2019-20
2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Formal 38.30 58.90 20.60 53.8%
Informal 434.60 476.45 41.85 9.6%
Total 472.90 535.34 62.44 13.2%
Organized & Unorganized (in millions)
©K. V. Subramanian

Formal Employmentin organizedsector ↑ by 13.8
mn in 2019-20 vis-à-vis 2011-12= growth of 37.2%
49
2011-12 2019-20
2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Formal 37.10 50.90 13.80 37.2%
Informal 44.70 44.57 -0.13 -0.3%
Total 81.80 95.47 13.67 16.7%
Organized sector (in millions)
©K. V. Subramanian

Formal employmentin unorganized sector ↑ by 6.4
mn in 2019-20 vis-à-vis 2011-12= growth of 400%
50
2011-12 2019-20
2019-20 vs
2011-12
2019-20 vs
2011-12 (%)
Formal 1.60 8.00 6.40 400.1%
Informal 389.50 431.87 42.37 10.9%
Total 391.10 439.87 48.77 12.5%
Unorganized sector (in millions)
©K. V. Subramanian

Labour Force ParticipationRate (LFPR),Worker
Participation Rate(WPR) have ↑ and
Unemployment Rate(UR) ↓ over last4 years
Years LFPR (%) WPR (%) UR (%)
2017-18 49.8 46.8 6.0
2018-19 50.2 47.3 5.8
2019-20 53.5 50.9 4.8
2020-21 54.9 52.6 4.2
Above data is from Annual PLFS data by NSSO.
Quarterly PLFS report by NSSO, which only tracks urban areas, showed
sharp ↑ in unemployment rate due to Covid lockdown (20.8% in Apr –
Jun, 2020 quarter).
NSSO’s Survey methodology is thus quite robust and results reliable.
Note NSSO data is not administrative data

Potential Challenges & Risk
factors

Is quality of macro-data a challenge? No… See
Economic Survey 2019-20
❑No! See https://www.indiabudget.gov.in/budget2020-
21/economicsurvey/doc/vol1chapter/echap10_Vol1.pdf
❑Using careful statistical and econometric analysis, this chapter finds no
evidence of mis-estimation of India’s GDP growth. The models that
incorrectly over-estimateGDP growth by 2.8% for India post-2011 also
mis-estimate GDP growth over the same time period for 51/95 other
countries in the sample. The magnitudeof mis-estimation in the
incorrectly specified model is anywhere between +4% to -4.6%,
including UK by +1.6%, Germany by +1.0%, Singapore by -2.3%, South
Africa by -1.2% and Belgium by -1.3%. However, when the models are
estimated correctly by accounting for all unobserved differences among
countries as well as the differential trends in GDP growth across
countries, GDP growth for most of these 52 countries (including India)
is neither over- or underestimated. In sum, concerns of over-estimation
of India’s GDP are unfounded. 53
©K. V. Subramanian

Real Challenges and Risk Factors
❑Global economy, especially supply-side problems
stemming from the Ukraine war
❑Inflation becoming systematically embedded through
inflation expectations, which then may lead to
monetary policy being unsupportive of growth
❑Implementation of several initiatives and reforms
announced post Covid

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India Story - Prof. KV Subramanian.pdf

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