Exclusive: Chief Economist Dr. S.P. Sharma on the great Indian growth story

In the January 2024 edition of Global Economic Prospects, the World Bank flagged slowing growth in response to ‘tight monetary policy, restrictive financial conditions, and feeble global trade and investment.’

Of particular concern are the geopolitical developments in the Middle East, elevated levels of debt, and the potential for ‘commodity market disruptions’.

In the coming twelve months, global growth is estimated to moderate to 2.4%, which would mark a third consecutive year of deceleration.

In comparison, India is the fastest-growing major economy in the world.

The report estimates the country’s 2023 growth at 6.3%, with a further acceleration to 6.4% and 6.5% in the coming two years.

So, how is it that India is continuing to experience such positive growth momentum in a globally challenging environment?

To delve into the key drivers of India’s growth story, its dynamic reform process, the central role of the banking system in the unfolding transformation, and the newly emerging opportunities as well as evolving challenges, we had the pleasure of speaking with Dr. S.P. Sharma, Chief Economist and Deputy Secretary General of the New-Delhi based PHD Chamber of Commerce and Industry (PHDCCI).

As a forward-looking, proactive, and dynamic pan-India apex organization, PHDCCI engages with more than 150,000 large, medium, and small industry players, as well as high commissions and embassies to drive fresh business opportunities and the adoption of international best practices.

Acting as the “Voice of Industry and Trade,” PHDCCI has been a key catalyst for the promotion of Indian industry, trade, and entrepreneurship over the past 118 years.

Speaker biography

Dr S P Sharma has around 25 years of diverse experience in the various areas of the economy, trade and industry.

He started his career with Government of Punjab in 1996 and subsequently moved to Government of India, ASSOCHAM, PwC and TATAs.

Currently, he is working with the prestigious industry body, PHD Chamber of Commerce & Industry as Chief Economist and Deputy Secretary General.

He has conducted more than 200 research studies/ papers/ projects etc. with prestigious organizations such as Government of India, State Governments, UNCTAD, European Commission, Industry Chambers/ Associations and Corporates.

He has participated in more than 300 programmes as an esteemed panellist/ Chair/ Moderator etc. organized by various reputed Government as well as Industry organizations, trade associations, educational institutes, and research organizations, among others.

Dr. Sharma addressed the International Research Conference on India-UK Economic and Regulatory Perspective organized by University of Portsmouth, UK; Seminar on Global Value Chains at University of Leeds, UK; International Conference on Global Value Chains and Industry @ 75 at IIM Trichy - India, Trade & Investment opportunities between India and USA, New Jersey.

Recently, he addressed the International National Climate Summit - 2022 in Bergen, Norway on 30th August, 2021 and 31st August, 2022.

He has appeared in various prestigious panel discussions/round tables conducted by TV channels such as Lok Sabha TV, Sansad TV, Doordarshan, CNBC and various other private channels more than 200 times. He is a regular participant in the prestigious programme ‘Market Mantra’ of All India Radio.

He is a member of Editorial Board of Journal Press of India, the Advisory Group of Birla Institute of Management and Technology, Surya Foundation, Geeta Rattan Institute of Management, Indian Institute of Finance, Jaipuria Institute of Management, Presidency University Bangalore, among others.

He is a member of the Industry Monitoring Group, Reserve Bank of India and Professional Forecasters Team, Reserve Bank of India.

Dr Sharma holds an M. Phil in Industrial Economics and PhD in International Economics from the prestigious Panjab University, Chandigarh.

Q) Thank you very much for speaking with us, Dr Sharma. What is your current assessment of the Indian economy as well as over a longer time frame? What are your expectations from the upcoming budget season and what would be on your budgetary wish list?

A) Today, India’s outlook is very strong. In the post-COVID years, India’s economic resilience has increased significantly. During the last two financial years, India has been growing at more than 7%. India is outperforming in GDP growth with a growth rate of 9.1% in 2021–22 and 7.2% in 2022–23.

Current year projections are also high and expectations are that the economy will grow at more than 7.3%. According to IMF projections, moving forward, the economy is expected to see continued strong momentum growing in a higher and higher trajectory. In the current financial year, the economy is expected to grow to $4 trillion, surpass $5 trillion in 2026-27, and become a $7 trillion economy by 2030.

Overall, the economic trajectory has been highly resilient in the post-pandemic years and has been well supported by various reforms undertaken by the government during the pandemic years. Various reforms such as the Atma Nirbhar Bharat, the Production Linked Incentives (PLI) scheme for manufacturing, and a lot of reforms in the Micro, Small, and Medium Enterprises (MSME) sector have sustained and propelled the growth story.

As the IMF stated, India is a ‘bright spot’ in the global ecosystem. Based on parameters such as the GDP numbers and other key macroeconomic indicators, the economy is resilient as compared to the other leading economies.

The futuristic outlook remains very strong. We are going to become a developed economy by 2047, and we will grow to the size of $7 trillion in 2030. So, a prime picture is depicted by the Indian economy, and India has become a great growth leader in the World economic system.

Regarding the budget, the focus must be on manufacturing which is now a core driver of the Indian economy. There needs to be more emphasis on the ease of doing business, and policymakers must ensure that any new reforms should percolate to the ground level. This is especially important since factories need more and more reforms to become increasingly competitive in the domestic and international markets.

Though the government is reducing a lot of compliances, there is a need to focus more on factory developments, on hand-holding for the ease of doing business, and on reducing the cost of doing business.

The suggestions of our industry body, the PHD Chamber of Commerce and Industry (PHDCCI), are that there must be a greater focus on cost-cutting of enterprises so that their price-cost margins become benign, and they can be more competitive in the domestic and international marketplace.

Q) What is your assessment of India’s banking system today, both domestically as well as in the international context?

A) India’s banking system is very strong as compared with many economies and has demonstrated this in the two major crises over the past twenty years. Starting from the Lehman crisis, our banking system has remained robust and we recovered sooner rather than later. Our recovery was very strong and the lows were around a GDP of 6.8%.

The banking system is robust and well-supported by policy continuation on the part of the government. For instance, the National Asset Reconstruction Limited Company (NARLC) was set up by the Union government in 2021-22 for the resolution of stressed assets in the banking sector.

Overall, the stress levels as projected by many analysts across domestic and international markets are not so high as to impact the banking system. We also benefit from a mixed banking structure and there is a great synchronization of policies between the government banks and private sector banks which continue to move in tandem.

There is also a strong vigilance of the regulatory bodies which ensures that risks are mitigated.

Recently, during the pandemic, we observed that banking stress was heightened in the USA and Europe which also led to many other associated economic and financial issues. But in India, I do not see any such challenge over the course of the past 3-4 years particularly because of economic reforms or the integrity of the system.

We look forward to our banking system continuing to support the economy with the addition of trillions of dollars in the coming times.

Q) In your view what have been the most significant changes in the last 5-6 years that have helped to stabilize the Indian banking system? How would you describe the overall process of banking reform in the country?

A) There has been a plethora of significant reforms undertaken by RBI. The launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY) in 2015 which played a pivotal role in supporting the downtrodden at the time of the pandemic in 2021. In 2016, there was the rollout of the Insolvency and Bankruptcy Code (IBC).

In 2019-20, the mergers of the public sector banks in India, which was also a noteworthy reform, ensured the capitalization of the banking system so they could continue to support businesses and corporates with expanded capital.

The banking sector also provided the emergency credit scheme to the MSMEs which was to both check the health of the banking system and to ensure support for the manufacturing sector – so that was a win-win situation and proved beneficial for the overall economy.

Recently, Central Bank Digital Currency (CBDC) was launched which is a monumental development in the banking system; along with the NARCL as mentioned earlier. So, banking sector reforms are continuing and I also do not see any area where banking sector reforms have not happened.

Overall, the banking sector remains sustainable at this juncture. With market capitalization at a high level, I do not see any capital issues in the system.

The process of reforms is evolving and continuing year after year. These in turn support manufacturing and the overall growth of the economy. I think that reforms must continue to be supported by a regulatory environment that enables a great synchronization of private and public sector banks to drive the sustainable growth of the economy.

However, since the global economic system is dynamic, we must be vigilant about any recent developments so that there is no external shock or challenge to our banking system.

Q) What is your assessment of the Reserve Bank of India’s (RBI) monetary policy at this time? What are your expectations for the coming year?

A) We are very good at managing monetary policy and are one of the most successful in controlling inflation.

The inflation trajectory started accelerating in April 2022 and reached multi-year highs, with the WPI peaking at 16% and the CPI reaching above 7%. But in just a short period, we were able to control WPI inflation by October 2022 and CPI by March 2024.

However, as the economic system is becoming more and more dynamic and the developments in the geopolitical sphere, particularly with the risks of geopolitical fragmentation, there is volatility in the inflation segment.

Our banking system and particularly the RBI is vigilant about developments in the inflation trajectory. At present, inflation is very much in control and within the RBI’s inflation targeting band of 2%-6%.

Going forward, this is expected to decelerate further to the level of 4% in the coming times.

In terms of monetary policy, although the repo rate is high compared to the historical trend, we look forward to maintaining our strong growth trajectory and expect the RBI to consider easing the repo rate as and when inflationary conditions start becoming benign.

The RBI is very diligent in maintaining both growth and addressing the inflation situation.

Going forward, we are confident that the RBI will continue to pursue calibrated steps to support the economy along with high growth and address inflation to prevent further escalation.

Q) In your view, what are the key bottlenecks for the transmission of monetary policy to the business level in India – both for large corporates and MSMEs? How can these be tackled most effectively?

A) Yes, the banking side does have certain bottlenecks because of which MSMEs are not able to get adequate finances due to collateral requirements and sometimes elevated interest rates. The banking system, as I mentioned earlier, has been vigilant in addressing the challenges created by the global economic environment.

Sometimes the MSMEs may feel that they are not adequately supported by the expansion in credit because of collateral. However, due to developments in recent months, these enterprises are now becoming more positive, and certain policy suggestions of the corporate sector are being taken into consideration by the banking sector to better support small businesses and the MSMEs. 

Earlier, due to concerning economic developments such as the pandemic, the US-China trade war, and other factors that led to a slowdown in the economy, the banking sector was not robust enough to support small businesses but recently this challenge has also been effectively addressed.

Key measures to support MSMEs have included an emergency credit line which has helped significantly. Many enterprises availed of this scheme to tide over difficult times, and the government rolled out extensions in this scheme which has become a robust source of support to the manufacturing sector in the last 3-4 years.  

Before this, the PMDJY was created for the public, and the Pradhan Mantri MUDRA Yojana (PMMY) scheme also supported the lower middle class and aided in fulfilling their aspirations.

We look forward to the banking sector being at the forefront to help small businesses so that they are also participating in the growth trajectory of the Indian economy strongly. 

Q) How can India most sustainably lower the cost of borrowing?

A) Inflation comes again and again and changes the thought processes of policymakers as the tolerance level among businesses and households is not so high. As we have to support the middle class and the downtrodden, we can’t tolerate high inflation that is beyond the inflation trajectory of the RBI.

So, if inflation remains high, then it will be very difficult to reduce the repo rate. Thus, the reforms should happen on the supply side since inflation is often stoked by food prices. Since the supply chains are not robust enough hence focusing on agri-infrastructure and rural development would reduce wastage of food grains. This wastage should be reduced from the current 30%-35% to the level of 5%-10% so that supplies are becoming benign and the prices are coming to rational levels.

Sometimes the prices of tomatoes, potatoes, and onions can increase from ₹5 to ₹200. This trajectory of the prices can lead to some difficult times. We have to address this high variation in food prices so that the prices are rational and do not stoke the inflation trajectory in many junctures.

Q) In the years to come, what are the most significant reforms that are likely to benefit India Inc.? What are your views on the impact of India’s digital revolution?

A) India Inc. needs more focus on the cost of doing business and the ease of doing business.

Five costs are impacting the trajectory of reforms and limiting the competitiveness of businesses in the international market. These costs are the cost of power, the cost of compliance, the cost of finances, the cost of logistics, and the cost of land.

These costs are impacting the cost-price margins of producers and they are not able to compete effectively in international and domestic markets.

There must be a sustained effort to reduce our import content so that there is a level playing field, where we are becoming more competitive, and we are becoming stronger and more visible in the global export scenario.

The digital revolution is now very visible and we are now at the top of all the advanced economies, and our digital transactions are in the billions. So, we have adopted this change and we have surprised the world with our digital transactions which are now accelerating economic growth and that is why we are robust in our GDP numbers and have strong underlying support for the economy. 

The digital processes are happening at the lower economic levels also. For instance, rickshaw pullers are now using digital transactions. This is a great support to the economy and to speed up the economy, which is pushing the thought processes of leaders and businesses who are finding there is great support to revolutionize this process and to generate more employment with the expanded speed of the economy. 

Q) How can the shift to low-carbon growth be mainstreamed without impacting the interest of corporates and broader economic growth?

A) We have to address all these challenges in a calibrated manner.

The corporate sector is highly committed to achieving zero emissions by 2070 and fully supports the government's vision. However, this involves a high cost also, which means we have to find funding support for the shift to low-carbon growth.

Since India’s effective reforms have built steady strides for its journey from an emerging economy to the emerging economic superpower, transitioning to low-carbon growth will also become robust after a few years.

Q) On the international front, what is your assessment of the Fed’s recent minutes; what is your outlook on US inflation?

A) US inflation is coming down and the Fed has also chosen to pause.

On the growth front, the US is rejuvenating its economic system and can surprise with its growth trajectory. There are a lot of positive developments in the US, and the economy is expected to perform robustly in the coming quarters.

On the other hand, Europe is facing a slowdown, in large part due to a lack of tourism. Earlier in 2021-22, there was a lot of tourism development but now this segment is slowing. That’s why Europe is facing a slowdown in GDP growth.

I am expecting the Fed pause should continue and there will be room to reduce the Fed rate in the coming quarters. This will provide great momentum and positive support to the corporate sector and the whole world while moving forward, and that will change the overall scenario in the coming quarters.

On the downside, geopolitical developments are impacting the thought process and estimates, of many policymakers. If this problem is addressed, I think the world economy will have great potential to post a greater than 4% growth in the coming years.

Q) Would you like to share any parting words with our readers about where the most significant opportunities in India will likely be over the next decade?

A) Capital markets will remain strong and will continue to be a major growth driver for the economy.

The second area is startups which is a segment that is becoming stronger and giving a great surprise to the global leaders and global investors.

Thirdly, India is going to become a major manufacturing hub with the support of the government and the ongoing reform processes.

I think India is a promising country and we have proved in recent years that despite the difficult time, we have remained robust and lucrative on the global stage.