Why India's Growth Story is on Shaky Grounds...

Fri, 3 Jun Pre-Open

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A robust set of data recently made India look like the world’s fastest growing economy. The latest GDP data released shows that the GDP growth for FY16 stood at 7.6%. This was recorded as the highest growth rate in last five years. The data also pointed out various sectors having clocked a healthy growth rate during FY16. The data reinforced bets that the Indian economy is bouncing back.

The growth story is India is not something new. India's resilient growth amidst a global slowdown has attracted a lot of attention. However, the prime question at our concern is will this momentum sustain in the years to come?

To answer that let us have a look at some of the macro tidbits that continue to pose threat to the Indian economy.

The chief point in consideration can be the investment environment. While the consumption in India continues to grow, investment has been flagging. Investments by companies in India has not shown any major signs of recovery. The global environment has threatened companies in taking any further risks. Excess capacities have burdened many companies. Furthermore, in many cases these excess capacities have remained unutilized. Also, the availability of cheap stressed assets has led companies to expand their market share without investing time and capital in greenfield projects. By that, companies are holding off on large investment plans. An article in Economic Times states that gross fixed capital formation has fallen from 30.8% of GDP in FY15 to 29.3% in FY16.

Then we have the problem of loss-making businesses. The government has continued to run an extensive network of these businesses. And the government has continued to take their huge losses without making any major efforts to sell them or shut them down.

Moving forward, we have the problem of rising non-performing assets (NPAs). The issue has kept Indian banks in a sorry state. Tanushree Banerjee, co-head of research at Equitymaster, has stated how banks have accumulated NPAs worth billions of rupees in one of the editions of The Equitymaster Research Digest (subscription required).

These are some of the major concerns, among many, that are weighing on the Indian economy.

Despite all of this, how can India be the world’s fastest growing economy? In our recent edition of The 5 Minute WrapUp we have answered what has been the crucial factor contributing to India’s growth...and how it has been the common thread between most of India’s economic problems.

Going by the above observations, we believe the economic growth may be on shaky grounds. The recent news may provide some room for the optimism to continue. However, if things keep on going as they are today, India will have lesser credit to be called as the world’s fastest growing economy in the long term.

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