Fearsome five headwinds

For a country facing multiple headwinds, India looks oddly relaxed.

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The stock market still hovers near record highs. Shopping malls are busy. Interest rates are stable. Sales of cars and bikes are rising. High-end property sales are strong. To investors and policymakers, this feels like smooth sailing. That confidence could be misleading. Beneath the surface, India is entering a slower phase — one defined by five forces.These are high government debt-to-GDP (gross domestic product), a slowing domestic revenue engine, lower household savings, and a more hostile geopolitical environment, all of which will lead to populist politics. India has managed each of these forces separately in the past. But together, they threaten to undo the growth narrative on which today’s optimism rests.

Debt-to-GDP

The finance minister (FM) has declared that reducing the debt-to-GDP ratio will be her core priority. According to the International Monetary Fund (IMF), India’s debt-to-GDP ratio is above 80 per cent of GDP, which includes the combined debts of the central and state governments. But how will the government reduce debt? According to several fiscal estimates, four fixed overheads — salaries (around 28 per cent), pensions (15 per cent), interest on the existing debt (25 per cent), and subsidies and welfare (15 per cent) — together absorb more than 80 per cent of government revenues, leaving little room for debt reduction. In a recent meeting with the Prime Minister, economists argued for reducing capital expenditure (capex) to cut debt. But since government capex has been the single-most important engine pulling the economy for the past three years, what will happen to GDP growth if government capex is cut? We are indeed between a rock and a hard place.

Slower revenue growth