Does this verdict derail India’s economic growth and reform process?

Mechanics of the low to middle income economic transition

India’s current stage of economic evolution

India would currently be classified as a low income country (2000-2500$ per capita GDP) - similar to where China was in the late ‘90s’s of where Korea was in the early ‘70s. To make the quantum jump from a low income to a middle income economy (8000-10000$ per capita GDP) requires growth in jobs at a mass population scale, which in turn boosts per capita GDP.  

Countries who made this economic transition, followed a common playbook 

1. Incentivize manufacturing, causing labour migration from rural to industrial areas in search of jobs

2. This leads to rural labour shortages and forces agriculture to start mechanizing and modernizing

3. To handle the influx of labour, industrial townships are built, requiring development of infrastructure. Real estate comes up as a by-product.  

4. The logistics ecosystem needs to be significantly enhanced to support greater economic activity across manufacturing and agriculture.

These areas - collectively termed as the core economic sectors - are where >90% of the population in a low income country like India is engaged in, mostly as un-organized labour. Concerted policy and budgetary support to grow these areas can create formal jobs at mass scale. Coupling job creation with annual increments, when compounded over 15-20 years leads to a 4 - 5x growth in per capita GDP.

It’s a simple playbook conceptually, which is why it has been adopted by multiple countries over the past few centuries.   

The mechanics of enabling growth in the core sectors

The path to grow these areas i.e. manufacturing, agriculture, infrastructure, real estate and logistics requires investments in hard assets. This is typically funded by a mix of debt and equity with a majority of it (~70%) being debt. 

Hence India’s prospects of executing on its low income to middle income economic transition hinges on the attractiveness of its debt markets.

• For international investors, Indian bond markets offer an attractive mix of relatively high coupons, fiscal discipline and a proven democracy.

• Indian bond markets are signaling a structural shift wherein yields only repriced by 100 bps since 2021 while the FED undertook the fastest hiking cycle in its history and US bond yields rose by 400 bps. This would have been unthinkable historically.

• As a result of this INR volatility has also reduced significantly this decade which has allowed FX hedging costs to reduce from ~4% to ~1.5%

• India’s pension penetration (~10% of the population) and life insurance penetration (~3%) are still very low. As formal employment and insurance coverage grows, the demand for debt from pension and insurance funds will increase exponentially.  Typically, between 70 to 90% of allocations by pensions and insurance funds are into debt.

• INVITs (an infrastructure REITS) are a capital market product introduced recently, to channel savings into long term revenue generating assets. Tweaks in taxation can drive large volumes of domestic savings into this asset class as most savers are hungry for attractive post tax yields. 

• India will enter global bond indices later this year for the very first time. It’s sovereign bonds are rated at the lowest rung of Investment Grade globally (BBB-). This should change as wider foreign ownership happens.

Hence, critical ingredients for attractive debt markets i.e. rich coupons, domestic buying power and a stable currency are already in place.

Hence the debt funding to build high quality assets across core sectors like manufacturing, energy, infrastructure, mining and real estate are likely to be readily available in scale for issuers with proven execution capabilities. 

This implies that India’s economic growth prospects are unlikely to be affected too much in the post election scenario.

Mapping the economic imperative with the political set-up

This is not the first time that India has had a coalition government in its history post the economic liberalization of 1991, and through that, economic growth has continued. The most far -reaching reforms in India i.e. the Goods & Services tax (GST) was enacted during the NDA’s 2014-19 tenure where it needed to garner the opposition’s consensus.

The election results have reinforced the need for mass scale jobs exactly in line with India’s current stage of evolution, implying that irrespective of who is in power, the need to focus on growing the core sectors is a necessity.

The bottom-line though is that economic growth is a function of people and it's the people who have voted for a focus on job creation and better governance.