As India continues to implement a series of structural reforms, the impact of each of these is gradually percolating into the economy. All these reforms, be it demonetisation, Insolvency and Bankruptcy Code, Real Estate Regulation Act (RERA) or Goods and Services Tax (GST), will have an impact that will gradually add on to the momentum of the Indian economy, which is already on a strong upward trajectory.
The clamour to see immediate returns from what are long-term, structural reforms is similar to a complaint I have often heard from a lot of people who claim that India is not growing, neither has it grown much in the last two or three decades. A simple comparison with two countries which are considered peers to India, Brazil and Russia, should clear up that false notion. In 2004, the Indian economy was as big as either of Brazil or Russia — by 2016, India was as big as Brazil and Russia put together! In that time, India’s GDP has more than tripled from $0.7 trillion to $2.3 trillion!
While there would be short-term volatilities, the long-term trend for India has been towards growth, a fact often missed by a lot of people. Because this growth is so implicit, it is often not visible directly — clearly ‘India Grows At Night’.
Albert Einstein once said, “Compound Interest is the eighth wonder of the world.” The power of compounding drives from three main factors — the size, the rate of growth and the time for which this growth will accrue. Luckily for India, we are at a point where all these three factors shine favourably upon us. The structural reforms initiated by the government will add further impetus to the rate at which India is growing. The GST itself is expected to add 1.5 per cent-2 per cent to India’s GDP growth. With a strong growth rate which is expected to sustain for a continued period of time and a $2 trillion economy, India is poised for a sustained and significant compounding effect going forward.
This compounding effect could propel India into a $5 trillion economy by 2025 and a $20 trillion economy by 2040, by which time we would be the third largest economy in the world after the USA and China. As this growth momentum takes shape, a variety of changes will develop. Some of these would be a consequence of this growth momentum. The growth in credit and deposits in the system has been following the compounding effect witnessed by our GDP. Over the last two decades, both our credit and deposit base has doubled every four and five years in rupee terms, a trend which is expected to sustain going forward. There will be other changes which will actually drive this growth momentum. The key amongst these would be the democratisation of credit.
Democratisation of financial markets has been an evolutionary process in India. Today, the equity market is completely democratised with market forces the sole determinant in any equity market transaction. Capital allocation in the equity markets and the bond markets is a function of the strength and sustainability of the underlying organisation with more stable organisations getting access to cheaper and easily available capital.
We are at the juxtaposition of a fascinating moment in India’s economic journey. All the ingredients required for strong and sustained economic growth are available. The economic reforms being undertaken will only add on to this potent mixture. The Indian economy is set for a bright future ahead with the growth story becoming bigger and better as we continue to be one of the fastest growing major economies in the world.
The author is chairman and CEO, Edelweiss Group