Supply Chain Shifts and Reforms to Boost India's Potential Growth: UBS
India”s economic growth could see a significant rise to 6.25-6.75% YoY by 2030 in an optimistic scenario, and 6.75-7.25% YoY in a blue-sky scenario, leading to substantial job creation, according to a UBS report. India stands to benefit from the ongoing supply chain shifts resulting from the US-China trade tensions, deglobalization, and pandemic- disruptions. While acknowledging that replicating China”s manufacturing success is challenging, the report noted that India, along with Vietnam, could capitalise on supply chain realignments and policy reforms to bring economic growth and job opportunities.
The report underlines the importance of low-cost manufacturing, scale, and infrastructure as key drivers for India”s competitive advantage in this context. In the short term, however, UBS economists noted that a comprehensive economic recovery is yet to be realised.
Despite reasonably positive headline growth, the post-pandemic economic recovery remains uneven across various metrics such as the rural-urban divide, growth disparity between manufacturing and services sectors, and differences in demand between affluent and lower-income households.
UBS predicts a slight deceleration in growth to 6.1% compared to the previous year”s 7.2%. The report expects the first quarter to exhibit a robust growth of 7.5-8% due to favourable base effects, with momentum tapering off to an average growth of 5-6% for the remainder of the year.
While government capital expenditure and resilient demand in the residential real estate sector have contributed to sustained capex growth, the revival of private corporate capex remains gradual, according to the report.
The Reserve Bank of India (RBI) has set a growth target of 6.5% for the fiscal year 2023-2024, along with inflation target of 5.4%. UBS expects inflation to average around 5.4% for the year, but it expects elevated vegetable prices to push inflation above 7% in August. The report suggests that proactive food management policies by policymakers and a potential reduction in fuel prices in the latter half of the year could help alleviate price pressures.
UBS projects a reduction in the current account deficit to 1.5% for the fiscal year 2023-2024, and it anticipates the government to achieve its fiscal deficit target of 5.9%. The report highlights the possibility of a higher-than-expected surplus transfer from RBI, which could provide leeway for increased rural and social spending ahead of a busy election calendar while maintaining fiscal discipline.
Overall, the UBS report indicates that India”s economic trajectory is going to benefit from supply chain dynamics and strategic reforms, potentially propelling the nation towards higher growth and enhanced job opportunities.
