India's animal spirits in midst of global recession are fueling optimism, says Ravi Agrawal . Agrawal: Government spending is helping the economy avoid a near-term economic slump .
Its not immediately clear that India has also seen the global slowdown: Investments in factories, roads, and other fixed assets are just shy of containing 35% of domestic production; they haven't been this high in ten years.Loan demand is so rapid that deposits can't keep up.What drives India's animal spirits in the midst of a global recession?Some of it is due to the economy reopening fully.In the first half of the year, contact-based services such as travel and hospitality emerged sharply from their pandemic funk, fueling optimism.Their quest for risk reduction has culminated in a visit to the second-most-populous nation, which is offering generous subsidies for everything from electronics and solar panels to electric-vehicle batteries and textiles.Its a brilliant blend of push and pull, but it isn't going to be of much help in avoiding a near-term economic slump.For one thing, the federal government is behind the increase in capital expenditure.Persistent above-target inflation contributed to increased tax revenues and pumped them into the highway. Banks in India have been more than willing to assist businesses in coping with the cash-flow crisis after a disaster.According to ICICI Securities, the total capital expenditure by federal and state governments, as well as large publicly traded firms this fiscal year will exceed 21 trillion rupees ($258 billion), more than double the annual investment rate between 2016 and 2018.Now that the pandemic has passed away, the double whammy of high inflation and indirect taxes, which were the source of steady government revenues, is beginning to affect average- and low-income households.The Nomuras consumption tracker dropped from 11 percentage points above its pre-pandemic reading in the June quarter to below that level in October. According to consumer-goods firms, rural demand is sluggish.After a gross domestic product increase of 6.3% in the September quarter, less than half of the previous three months, we suspect India's growth rate cycle has peaked and is starting a broad-based slowdown, according to Nomura analysts.The full-year rate is expected to be 5.2% at the eve of India's general election in the summer of 2024, leaving out the pandemic years, the country's second-worst rate of economic growth in more than a decade.It would put doubt on Prime Minister Narendra Modis arduous industrial policy push. According to official figures published in a Quint article, only 15% of the $33 billion in private investment approved by the government under its production-linked incentive program has been realized so far; fewer than 200,000 jobs were created as of September, compared to expectations of around 6 million.Even if the West's dissatisfaction with China intensifies, or if President Xi Jinping's Covid-19 plans are called off, there's nothing to suggest that private investment will do any significant good for India next year.That's because exports are starting to slow down for the majority of Asian suppliers.The recent GDP data indicates that the country's manufacturing sector is losing steam. The policy guideline for New Delhi is tepid.Yes, local interest rates will reach their peak in early 2023, but not before bringing the overall tightening in the current cycle to over 2 percentage points.Financial conditions could even get more challenging.If the conflict in Ukraine intensifies, or if China suddenly loosing its stringent virus protection, a commodity shortage relative to demand could arise. Banks are being forced to raise deposit rates in order to improve their liquidity standing, but they aren't as accommodating of credit risk as they have been this year.If they are, they will only be storing up ills for later this year.The growth forecast for India is precarious.The degree to which this situation may get worse will depend on how badly the global economy sputters. However, the wisdom in investing $24 billion in public funds over five years to accelerate a shift in global supply chains is bound to be questionable, particularly if India finds itself in the same low-growth rut as Modi's reign as Prime Minister in 2014.