The Indian economy is in a goldilocks phase with strong growth and manageable macro stability risks, said UBS Securities on Monday, adding that the economy is likely to grow by 7% this fiscal year.
In a webinar on Post-Election Indian Economy: Mapping India’s Growth Path, Tanvee Gupta Jain, Chief India Economist at UBS, said India is likely to maintain a potential growth of 6.5-7% year on year between FY26-30.
India’s potential growth could benefit from digitalisation adoption, increased services exports and manufacturing push and implementation of hard reforms will take the potential growth rate even higher than 7%.
“While political stability should help ensure continuity in policy agenda, we see risk of populist bias in the third term (targeted towards lower- income strata) and change in economic policy dynamics with tougher reforms getting pushed further out,” she said.
While the implementation of the long pending labour codes could still take place as these are already cleared by both houses of the Parliament, tougher reforms are likely to be pushed out as political capital is lower vis-à-vis 2019 and 2014 elections.
“We continue to expect a government push towards supply-side reforms including boost to manufacturing, labour law implementation, skill development and creating employment opportunities (especially blue-collar jobs in low-skilled labour-intensive manufacturing) amongst others,” Jain said, adding that the implementation of tougher reforms including land reforms, a big boost to infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections amongst others will be challenging.
“Implementation of hard reforms will help India take it potential growth higher than 7%,” she noted.
While the agency would watch out for the upcoming Union Budget announcement, its base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias.
“The higher-than-expected RBI dividend transfer to the government (additional 0.3% of GDP in FY25) would create fiscal leeway to increase populist spending to support consumption for lower income strata (cash transfers, higher rural spending, income tax rationalisation, affordable housing) while continuing its thrust to boost public capex,” Jain said.
The agency also highlighted that even as India’s growth remains resilient, there is an apparent dichotomy between household consumption growth (below trend since the pandemic) and real GDP growth (holding up well). “India is seeing a K-shaped consumption recovery with affluent and premium segment demand seemingly doing well, and demand for entry-level and mass-market goods has remained muted post the pandemic, Jain said, adding that this suggests that those at the lower end of the income pyramid, that were perhaps the most affected due to the pandemic, have still not seen their incomes recover to the level to regain their ability to spend.
Limited fiscal support for vulnerable sections of society and weather anomalies affecting rural income have further amplified the gap, she said, adding that to help broaden India’s growth, India needs a broad-based recovery in capex cycle as construction is the largest generator of jobs outside of agriculture.