The Indian economy has been growing at a robust rate by most conventional metrics and appears resilient as of now in the face of several geo-economic headwinds. Real GDP growth continues to hover around 7 – 8 percent according to official estimates, inflationary pressures are subdued, corporate balance sheets appear healthy, and the banking system is largely clear of non-performing assets. The rise of digital payments as well as Systematic Investment Plans (SIPs) has brought millions of households into formal channels of modern finance. The services trade surplus is growing, and strong remittance flows continue to anchor the external account. Overall, having weathered demonetisation, the twin balance sheet crisis, a global pandemic, and waves of geopolitical disruptions, the Indian economy is certainly not stagnant and appears reasonably stable.

Stability, to be sure, is not the same as invulnerability. Aggregate growth can hide vulnerabilities that become clear when we look more closely at the economy. This report does exactly that. Drawing on financial data on trade, capital flows, banking and credit, public finance, sectoral flow of funds, and capital markets, it ​‘follows the money’ to develop nine financial insights. Each highlights a pressure point that headline growth numbers can miss. Taken together, they point to three broad structural vulnerabilities that need attention, despite an otherwise reasonably healthy macroeconomic picture.

First, there is a structural demand shortfall, such that no single engine of aggregate demand is firing strongly enough. This weakness in demand is increasingly a constraint on private investment and thus calls for an active policy response. Second, financialisation is likely advancing faster than the productive base of the economy, bringing millions of households and institutions into financial markets but also making household wealth and macroeconomic stability more exposed to financial market conditions. Effective regulation of ​“high finance” is therefore critical. Third, external vulnerabilities are becoming more important in a changing global order. India’s trade remains highly concentrated in its relationships with the US and China, while its persistent goods trade deficit reflects, in part, the weakness of its manufacturing base. A geopolitically astute trade policy, combined with a robust industrial policy to make Indian goods — not just services — globally competitive, is increasingly important for both economic and national security.

Importantly, none of these vulnerabilities implies an impending crisis or ​“moment of doom.” But together they suggest that resilience should not be taken for granted, and that prompt policy action is needed to strengthen the foundations of India’s growth before vulnerabilities become crises. 

Authors:

Puneet Bhasin and Anshuman Singh