What can be the new drivers of the economy?
As many economies are building back from the pandemic, some are finding that new drivers are emerging and I think India is one of these economies. In the last couple of months, two new drivers have emerged, rather they have become more obvious now. One is exports. That has been growing quite rapidly. In fact, today exports are 17% higher than they were just on the eve of the pandemic. They have actually grown 36% quarter on quarter annualised in 2021 the year so far and it is in good place.
The other thing is the entire ecosystem around the new-age technology startups, that we are seeing in the economy and there it seems like the stars have aligned. Globally there is a lot of liquidity. There is an appetite for risk taking. There are geopolitical changes and a lot of money is coming into India and we are seeing that the number of startups are on the rise and there is a very good mix of supply and demand in that space. So these are the two drivers that are worth tracking for anybody who is interested in the growth of the Indian economy.
When you talk about the impact that the digital economy can have, the general sense right now is that the whole startup space is definitely growing at a rapid rate. But it is still a miniscule portion of the entire Indian economy. Do you think that can change and the digital economy can make a, huge difference be a driver of growth?
It is new, it is a digital economy and we cannot confuse it with what is old and what is the physical economy. What we can appreciate in the digital economy is the incremental growth, the delta that it brings. Of course, in terms of size, it is just a fraction of what the old physical economy is and that is sort of important to note.
Also one of your questions alluded to the fact that what if it only remains a fringe player? What if it only remains in pockets and does not have a nation-wide contribution? I think we have some countries to follow on that front. For example, in China, over the last decade, digital firms, e-commerce and
were big participants in their growth story. They came on the back of very strong physical infrastructure and that is something which we will need in our economy as well. My sense is that the digital dream will only be realised if the physical economy cooperates. One cannot write away the physical economy at all.
We saw 20.1% growth but that was on the back of an annual 24.4% drop quarter on quarter and a lot of arguments out there whether it really is a recovery or not. What is your outlook, when the finance ministry says that the next three quarters are going to be good even if there is a third wave? Are you feeling as enthused by the high vaccination rates?
In the short run, a few good things are happening. The economic rebound from the second wave was far more quicker, sharper than the rebound after the first wave. Also the economic cost of the second wave was only a third of the first wave. So these are positive developments. Also vaccination rates are rising. Hopefully, by December, about 50% or more of India’s population will be fully vaccinated and what we have been seeing so far is pent-up goods demand.
Once vaccination reaches critical mass, we could also benefit from pent-up services demand and that could become a driver of growth. The other positive, of course, are the new drivers that we are seeing in terms of exports and the proliferation of new-age technology firms. So these are good things.
On the same note, we also have to acknowledge some of the problems in the horizon and I think one of the big problems we have is rising informality and inequality. My sense is that whenever formalisation happens in India, it is in a forced manner. This time it was forced by the pandemic. In the beginning it is good for growth; stock markets are up, big companies do better. But over time if the informal sector suffers and inequality rises, then the overall purchasing power of a large section of people actually falls and that hurts the fortunes of the formal sector as well and growth could begin to slow.
We will not see it now and that is why I am saying it is good in the short run but two years down the line, we may have to pay the price for rising inequality. That is something which is underway at this point and that is something that keeps me a little cautious.
Another factor which may hit us even earlier and which is of concern is inflation. We are seeing that also being pushed by supply side constraints from across the globe. Do you see that as a matter of concern?
Things are very volatile, but every story has a different side to the extent a lot of people want to consume things but they cannot consume it because imports are getting held up because of high shipping costs. At some point, that will emerge as pent-up demand. What is slow right now, will pick up even more rapidly than normal later so this kind of volatility is something that will continue and we will have to be careful about it.
But just looking through these highly volatile trends, my sense is that the next couple of months or perhaps maybe the next couple of quarters will be good for India. We will be moving from pent-up goods demand to pent-up services demand. But this is also a window of opportunity in which we have to prepare ourselves because some of the scars that the pandemic leaves behind for example rising inequality and its impact on growth is something that we will only see down the line.