Why India's Economy is on the Rise
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Why India's Economy Is Accelerating

Various economic indicators show that the Indian economy is picking up pace. This acceleration in growth is likely to continue in 2016, driven in particular by the upcoming pay and pension hikes benefiting 34 million civil servants.

Broad-based economic indicators such as demand for oil and cars point toward a pickup in India's growth. "This indicates a strong revival of the country's economic momentum, as oil is consumed by almost every sector: by farmers, consumers, industry, logistics companies, etc. The economic weakness triggered by the forced fiscal consolidation in early 2015 definitely seems to be behind us," said Neelkanth Mishra, India Equity Strategist at Credit Suisse. Growth in oil demand reached its highest level in more than a decade in October. Retail sales were also very strong during September and October, supported by the upcoming Diwali – a Hindu festival similar to the Christmas and year-end festivities in the West. Another sector with the wind in its sails in October was automobiles, with two-wheel and four-wheel sales rising 13 percent and 21 percent, respectively. "We believe that four-wheel sales are being helped by taxi aggregator apps like Ola and Uber. While the subsidies provided by these apps may not be sustainable, they do act as stimuli in the interim," said Prateek Singh, a research analyst at Credit Suisse. India's household car ownership rate nevertheless remains low – 19 percent in 2014.

indian recovery chart

Indian Oil Demand at 10-Year High

Sources: PPAC, Credit Suisse 

Modernization of Infrastructure Underway

Increased government spending on infrastructure, with a special focus on roads is also boosting the Indian economy. Some 89 billion rupees were spent on roads in September alone, compared with a total of 330 billion rupees during the entire 2014-15 fiscal year. With regard to the country's railways the focus is on operational reforms, which should lead to an urgently needed expansion of rail capacity. "Public capital expenditures are clearly up. The Indian government has focused on national highways and railways, and raised spending on healthcare. It has benefited from tax receipts near record highs, with sharply higher income from excise duties on both petrol and diesel, as well as a sharp increase in the personal income tax. The government has also sharply reduced its spending on inefficient schemes, such as LPG subsidies," Mishra stressed. The Indian economy grew by 7.4 percent during the third quarter of 2015, driven by this government spending on infrastructure and by private consumption.

indian recovery chart 2

Heavy Investments in Roads

Sources: CGA, Credit Suisse estimates

Indian Productivity Growth on the Rise

A couple of rudimentary changes have been driving the country's productivity over the past years. In 2011, a third of India's households had no access to electricity and the remaining two-thirds used to suffer from power cuts several hours per day. "There has been a strong acceleration in the electrification of households over the past two years. Today around 80 percent of the population has access to electricity and the availability of power has improved, resulting in fewer and shorter power cuts. An increasing share of the population now also has a phone connection. All these basic improvements to people's daily lives are driving India's very strong productivity growth, though admittedly from a low level," Mishra explained. But the reform with the biggest impact so far is probably the government's financial inclusion scheme. "The number of households with access to bank accounts has risen from around half of the population in 2014 to nearly 100 percent a year later. This means that millions of Indian households and entrepreneurs now for the first time have access to (state) subsidies and (private) microcredits. They are finally part of the financial system. These are small, but very powerful administrative steps," Mishra emphasized. Other important reforms currently under discussion and likely to have a significant impact on the Indian economy are the revamping of the country's bankruptcy code, a potential way out of the Indian financial system's unrecognized bad loans, and the adoption and implementation of a new, simplified tax code for goods and services. 

Upcoming Civil Servant Pay Hike Set to Boost the Entire Economy

The Indian government will also embark on a once-in-a-decade wage and pension hike for the country's 34 million current and former civil servants as of June 2016. "The implementation of this 4.5 trillion Indian rupee (68 billion US dollar) package, equal to 2.8 percent of the country's gross domestic product, should stimulate private consumption further and have a very widespread impact across the country," Mishra noted. India's civil servants make up nearly 40 percent of India's formal sector employment. The state functions are widely dispersed across the country and often the main employer in smaller towns and villages. "This is the only time when these townships get a great surge in cash, catalyzing the rather dormant real estate market of smaller towns and in turn creating significant demand for (construction) labor," he added. This additional spending power may also spur demand for food, transportation, jewelry and entertainment, thus benefiting the entire economy. Foreign direct investments in India are also very strong, and likely to hit new records during the current fiscal year, which ends in March 2016, as well as during the upcoming fiscal year. As David Mulford, Vice Chairman International at Credit Suisse Investment Banking and former US ambassador to India, forecast: "My view is that India, among all emerging market countries, will be the leading grower in the next three to five years. It will occupy a place in the sun because other emerging markets such as Brazil and China have slowed down. India will have a real advantage and I expect it to be able to post annual growth rates in the 7 to 8.5 percent range." Mulford made this comment at the latest edition of the Asian Investment Conference held by Credit Suisse.