Chart of the Day: India’s growth differential with the world improving sharply

India's GDP growth exceeds expectations and the world

India's growth: exceeding expectations and the world

Investors have always judged emerging market economies based on their relative growth with the more safe and promising US economy. Wherever the differential between an EME and the US as also between EMEs has changed, investment has flowed accordingly. In this regard, India has gained much ground as one of the most sought-after markets to invest in. The increased interest among foreign investors in recent years has not been purely opportunistic. India’s growth advantage vis-à-vis the rest of the world has improved sharply after the pandemic. As the above chart from Barclays Research reproduced here shows, the gross domestic product (GDP) growth of India was 4.3 percentage points more than the rest of the world in 2022. During the pandemic years, the contraction of the economy was lower than in other countries. In short, India now offers macro stability to investors, a critical factor to determine risk and return.

Analysts at Barclays expect this differential to increase in the coming years. To be sure, the national elections next year would be a decisive factor. Stable governments would ensure a higher growth path which could help keep the differential higher. That said, higher growth can be achieved through quantitative targets and an approach to strengthen macroeconomic variables. “As such, we think the best way to aim for higher growth would be to strengthen certain macroeconomic variables, such as savings, maintain high levels of productivity, and making better use of India's fundamental advantages: clean balance sheets, private-sector dynamism, a geopolitical backdrop that favours manufacturing capacity build-up, and a young population in an ageing world,” the Barclays report said.

What’s more, the differential is back to the period of high growth seen in 2005-09 where both consumption and investment were galloping. At that time, the global economy too was doing well, unlike the present, when there is widespread deceleration.

There is also a flip side. India’s growth differential with the rest of the world has increased because global growth has decelerated sharply. In other words, India is shining because everyone else is doing worse. For the country to maintain its advantageous position, policymakers would have to encourage private investment as well as keep the consumption engine going.