Between 2023-2030 India's economy set for its strongest growth phase since 2010: Nomura Securities

After growing 7.2 per cent in the financial year 2022-23, there may be near-term headwinds for India's economy on the back of the impact of higher interest rates and a slowdown in the developed world among other things. However, looking past the near-term speed bumps, the country's economy between 2023-2030 may be set for its strongest growth phase since 2010, believes global securities firm Nomura.

"In our baseline scenario, India should register a CAGR of around 6.6 per cent between FY23 and FY30, a reversal from the falling contribution of capital and productivity in the past decade. This would be the strongest growth phase since FY10, and close to the accelerated growth observed during FY03-FY10 period, which was supported by a surge in capex," a team of Nomura economists, led by Sonal Varma, chief economist (India and Asia ex-Japan), said on Monday.

What drives the optimism among Nomura economists?

"While a mix of slowing global growth and lagged effects from monetary policy tightening are likely to impede India's growth prospects in the near term, there has been a marked shift in underlying fundamentals that support a much brighter medium-term outlook," they said.

The economists flagged several factors that will aid India's economic growth prospects over the next few years. For instance, banks and corporates have "significantly" deleveraged to clean up their balance sheets that had stalled private capital expenditure, they said.

India not only is the most populous country in the world, 67 per cent of its population is in the working age bracket. It also has the largest youth population among the G20 countries, according to Nomura.

These conducive initial conditions should be fortified by factors such as a stable political dispensation, with a "steadfast" focus on reforms, simplification of tax administration, production-linked incentives for manufacturing firms, focus on public capex and rapid digitisation of public services, according to the economists.

"A key push factor is the hastening of the pace of global friend-shoring, where India is emerging as a leading beneficiary of shifting supply chains. This puts India in a sweet spot over the next decade," they said.

India already has a strong manufacturing base in sectors like pharmaceuticals, automobiles, steel and textiles. The Centre announced production-linked incentives for 14 sectors with an intended outlay of Rs 2 lakh crore in a bid to expand manufacturing in sectors like semiconductors, electric vehicles, defence equipment, solar panels, batteries, and IT hardware among others.

The Nomura economists noted that barring some early successes in electronics, the overall progress so far had been slow, with less than 20 per cent of the intended investment coming through. However, they believe the full impact will be visible in three to five years.

The economists also pointed to a sharp scale-up of physical infrastructure, with the central government outlay on capex "accelerating" from pre-pandemic average of 1.7 per cent of the GDP to a budgeted 3.3 per cent of the GDP in the current financial year.

India already has a strong information technology services sector. It is now emerging as a popular destination for global capability centres or offshore units of multi-national corporations, providing support and high-end consulting in areas like finance, IT and data analytics, according to the economists, who say 1,800 such centres are already established, comprising over half of the global share.

Furthermore, the digital economy has also received a huge boost in recent years, through several digital public infrastructure projects like Aadhar, UPI-based digital payments, FASTag, open network for digital commerce (ONDC) and India Stack that are reducing transaction costs and boosting efficiency, while also allowing the startup ecosystem to flourish, they noted.

"Assuming government priorities remain largely consistent after the general elections in 2024, we expect a double boost from investment, with continued public capex and a gradual recovery in private capex due to a rising capacity utilisation rate. This should have a multiplier effect on the economy," according to the Nomura economists.

A larger boost to manufacturing and strong services demand should lead to higher net exports, contributing to an improvement in the structural current account deficit. Investment and productivity-driven growth over the medium term should also help contain inflation, the economists added.

For the equity markets, there is "limited" upside potential in the near term, but foundations are in place for "sustainable growth" over the medium to long term, they said.

"We would view any market correction as an opportunity to buy," they stressed.

The resilient growth outlook should also aid corporate earnings in the medium term, the economists said. They expect the Indian markets to trade at a premium to global peers, aided by stable macro conditions and higher earnings visibility. Strong domestic equity inflows through products like systematic investment plans of mutual funds will also support equity valuations, they added.