SBI Research is confident of savings, investments and the GDP, no matter the deceleration in recent ‘noisy’ quarters and should be best avoided for any serious interpretation.
Most importantly, the research team of State Bank of India is banking hopes on a rising trend in Incremental Capital Output ratio (ICOR), which measures additional unit of capital (investment) needed to produce additional unit of output.
ICOR which was 7.5 in FY 12 is now only 3.5 in FY22. Clearly, only half of capital is now needed for the next unit of output, it said.
“Such reducing ICOR in the current years reflects a relative increasing efficiency of capital. The talk on ICOR becomes relevant (as it) shows that the economy is on a sound footing,” said Soumya Kanti Ghosh, group chief economic adviser at SBI.
The ‘Hindu rate of growth’ debate
Former Reserve Bank of India Governor Raghuram Rajan in a recent interview to PTI said that India’s economy was “dangerously close” to the ‘Hindu’ rate of growth. He blamed weak private sector investment, high interest rates and deceleration in global growth.Hindu rate of growth is a term describing low Indian economic growth rates from the 1950s to the 1980s, which averaged around 4 per cent. The term was coined by Raj Krishna, an Indian economist, in 1978 to describe the slow growth.
Rajan said that sequential slowdown in the quarterly growth, as revealed by the latest estimate of national income released by the National Statistical Office (NSO) last month, was worrying.
SBI said it is clear that potential growth of the Indian economy (a global phenomenon) is now lower than earlier. From that point of view, future GDP growth rates even at 7% could still mean a decent number by any standards.
While India’s growth rates have been on a downtrend, key foreign banks and rating agencies have also slashed India’s growth targets.
Recently, Krishna Srinivasan, director of the Asia and Pacific Department at IMF, told ET Online that one has to go beyond the numbers to understand the strength of the country that is now the world’s fifth largest economy.
India’s economic growth in Q3 slowed to 4.4% from 6.3% in July-September and 13.2% in April-June. The growth in the third quarter of the previous financial year was 5.2 per cent.
India’s quarterly Y-o-Y GDP growth has been in a declining trend in FY23 sequentially, prompting arguments that India’s growth is reminiscent of a pre 1980 Raj Krishna coined growth rate, noted SBI.
“Apart from the fact that, quarterly growth numbers are noisy and should be best avoided for any serious interpretation (on an average, India’s GDP growth has witnessed Rs 2 lakh crores upward revision for the 3 year ended FY23), we find such argument ill-conceived, biased and pre-mature at its best when weighing the recent GDP numbers against the available data on savings and investments,” Ghosh said.
Savings, investments not pain points?
Amid reports that rocketing prices are burning Indians’ pockets, dragging household savings to a three-decade low, SBI argues that investment and savings data (as a percentage of GDP) for the past decade reveals interesting points.
Higher prices for goods and services across various sectors, including essential ones like telecom, auto, fuel and FMCG have led to consumers shelling out more than they did in recent years, leaving less in their wallets.
The household savings increased sharply during the pandemic period on account of sharp accretion in financial savings such as deposits. Household financial savings have since then moderated from 15.4% in 2020-21 to 11.1% in 2022-23.
However, SBI said that savings in physical assets have grown sharply to 11.8% in 2021-22 from 10.7% in 2020-21.
Gross savings rose to 30% in fiscal 2022 from 29% a year earlier and the ratio is supposed to have crossed 31% in 2022-23, the highest since 2018-19, SBI said.
Meanwhile, gross capital formation by the government had touched a high of 11.8% in 2021-22. This also had a domino effect on private sector investment that jumped from 10% to 10.8% over the same period, SBI said.
At the aggregate level, gross capital formation is supposed to have crossed 32% in 2022-23, the highest level since 2018-19.