How do we increase Per Capita GDP?

Oct 13, 2022

In a recent panel discussion that I moderated at the Morningstar Investment Conference, I had the pleasure of speaking to some esteemed economists.

One of them was SAUGATA BHATTACHARYA, Executive Vice President and Chief Economist at Axis Bank. His sharp acuity, concise thoughts, and sense of humour make him a distinctive economist. Here are some of his views.

  • CONTEXT: The size of India’s GDP has surpassed that of the U.K. to now trail behind only the U.S., China, Japan and Germany. Yet, the GDP per capita is low.
  • QUESTION: How is India combatting the structural issues that are not permitting the gap between GDP size and GDP per capita to narrow?

Despite the shortcomings in our physical infrastructure, our digital infrastructure is probably one of the best in the world. We have already started leveraging this and it needs to be taken forward.

There has been a pivot of government spending (centre and states) in terms of spending on CapEx rather than revenue spending.

The emphasis on national logistics that was just unveiled, Gati Shakti.

In the electricity sector we are seeing a cracking down. I recently read that the total dues of the distribution companies (DISCOM) to power generation companies (GENCO) have come down from about Rs 780 cr to Rs 50 cr and because they were refused access to the power exchanges for purchasing power.

One of the key problems in India is the lack of hard infrastructure. Another is high costs, and this is also true for our competitiveness as a global manufacturing and exporting hub.

All individual components - physical infrastructure, digital infrastructure, more credit and opportunities to micro, small and medium enterprises (MSME) - are hinged together to affect our national competitiveness. All these components will be very, very important to take India from $4,000-$5,000 per capita income over the next five years.

  • CONTEXT: On the topic of GDP, even with a huge population, China’s per capita GDP is way ahead of India. The pandemic also exacerbated pre-existing inequalities in India.
  • QUESTION: How do you see income inequality affecting economic growth?

Inequality is a huge problem. How do you devise social safety nets to protect? How do you increase access to health and education for the lowest-income households? This is something which needs to be given a lot of attention.

When it comes to providing social safety nets, one of the good things that the government has done is moving into a more insurance-based structure rather than active pay-outs, so health insurance, medical insurance, and so on. The Emergency Credit Line Guarantee Scheme (ECLGS) for ensuring a backstop for credit.

A private company data provider revealed statistics that in terms of income, expenditure, particularly savings, almost 80%, 85%, 90% of financial savings is concentrated in the top three deciles. If you grade the incomes of households by their incomes, the top three deciles account for 80%. And this is what I think is driving demand in the system.

While we talk about Capex being dependent on consumption demand, we are seeing evidence of premiumisation across categories of vehicles, residential buildings, FMCG goods, consumer durables, people are moving their demand for higher value-added. So, this is going to be a problem.

  • CONTEXT: The government has set a target of $1 trillion to be achieved by 2030 in terms of the exports, which is roughly around 5% of the global trade; almost double from where we stand right now.
  • QUESTION: What must India do to stand out in this highly competitive market?

There is a very immediate problem in terms of the unit value of exports. We are low. Textiles, for instance, if you look at Vietnam and Bangladesh. We need to add value to whatever we are doing - either manufacturing or merchandise exports. Now everything is bundled together as a service. You don't just export jet engines but the entire value chain right from design to maintenance. Engineering goods companies are beginning to add value, and that is a must. It's not just about getting market share. We need to add value to our exporting chains.

Our exports are largely a reflection of our domestic competitiveness. We have high unit costs – electricity, logistics, transport, other process inefficiencies, et cetera. One of the good things is happening in terms of technology because you can produce the same unit without requiring as much Capex. Plants are becoming more and more compact. You can almost set up a steel mill inside an auto factory to that extent. You save on land. You save on labour. But there is also a large amount of the Green Economy that is coming in that will add to our investment. Focusing on improving domestic competitiveness will ultimately lead to the value addition that we provide to exports.

I track Apple's plans in India very closely. They have plans to invest more than $50 billion over the next five years or so. That will be a very major value addition. Because if we get the electronics ecosystem in place, other large electronics manufacturers will follow. Foxconn, for instance. Their plan in India is likely to add to the high end of the mass electronics markets.

All these things are crucial in taking India to that $1 trillion target.

  • CONTEXT: The global central banks underestimated the threat of inflation post pandemic. And now we are seeing aggressive rate hikes by central banks globally to tame soaring inflation.
  • QUESTION: Will the RBI need to mirror that behaviour?

If you could dial back, go back one or two years, what should the Fed have done? Obviously, they should have started raising rates much, much ahead. It's not just a matter of growth being a problem; they will probably have to force a recession in the U.S. to be able to tame inflation.

Now the Fed and the ECB are each trying to outdo the other in terms of the aggression with which they need to raise rates. So, that is a problem.

In India, we had a 140-basis-points (1.4%) increase in our repo rate, and transmission in India is very, very rapid now. All of MSME loans, home loans, et cetera are now linked to that external benchmark - the repo rate. So, everything has gone up. Despite that activity seems to be quite good.

Will RBI need to follow the Fed? Will we need to mirror it?


Our inflation is not just food inflation but core inflation (non-fuel, non-food). So, that's likely to be a problem. But our inflation at 7% is 3 percentage points above the 4% target. Globally, their targets are around 2% and they are facing inflation in the 8% to 10% range. It's a vastly different situation there. A growth slowdown, probably even a recession is likely to be the only solution to taming inflation in those economies.

Where is the RBI they likely to stop? My own sense is they will probably need to go to about 6.25 at least in this cycle. But now, it depends on the data prints. Till now, all of central banks have been front-loading their rates. I think India is reaching a point where it's now likely to be more data-dependent going forward, and not as a matter of principle that we need to raise rates to a neutral level or whatever. But let's work with an assumption of 6.25.

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