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S&P Global Raises India's FY25 GDP Forecast: While The Going Is Good, Does It Get Better? And How?

Photo of India's GDP Growth

By AltG Investment Research Lab On Behalf Of Poornima Vardhan & Taponeel Mukherjee

For all the debate around India's GDP, the one issue that hasn't but needs to receive the most attention is "Capital". The Availability, Flexibility & Cost Of Capital will be the most important driver of India's 21st Century Economic Growth Story.

With the news of S&P Global raising India's FY25 growth forecast to 6.8%, the focus must shift towards further turbocharging the India growth story. We need to realise that regardless of which economic growth story people look at in human history, a push on the technology and financial frontier goes hand in hand with the next phase of growth. Financial Capital Innovation often leads to technology breakthroughs. Greater availability, flexibility and a lower cost of capital are the key to India unlocking double-digit economic growth. The debate needs to go from looking at aggregate amounts of capital to the "structure of capital".

How do we make more capital available to industries in the mid-market space (sub-INR 200 Crores annual revenue)? Firstly, it's important to realise that India's private companies are servicing the mega businesses that serve billions of Indians daily. There are thousands of such companies in need of innovative capital. These are businesses driving India's growth story and need capital that isn't in the form of a contingent liability like bank debt or equity.

There are two broad ways to do this. Firstly, use hybrid structures to provide capital to these businesses to give them much-needed expansion capital and allow them to achieve scale. An attractive taxation policy around such instruments is needed to bring these securities to the fore. Additionally, it's important to note that the laws must be easy to decipher, with no room for any confusion further down the road.

The second way to achieve scale is via platforms that can aggregate and provide expansion capital to such businesses. Essentially, access to capital will lead to expansion, which leads to scale, which leads to lower costs that enable the business to further expand the pie for other businesses.    

How do we make more flexible capital available to industries? Barring obvious corporate frauds, a significant number of bankruptcies are driven by asset-liability cash flow mismatches in India, leading to suboptimal projects and capital stuck in unproductive projects. Regulations around taxes and policies that enable flexibility of capital will be crucial.

Let's understand this better with an example. When you see a hospital asset lying in bankruptcy due to bank loans they couldn't finance, this problem stares us in the face. Businesses, financiers, and regulators alike need to realise that an asset with a gestation period before the revenue ramp-up is unsuitable for pure bank debt. An alternative is structures that allow a separation of the construction phase from the revenue-generating phase for companies to better match the asset-liability cash flows.

The difference between having flexible capital and not having it is massive. Bank capital stuck in such bankruptcies is essentially capital that is not accessible to the economic growth engine. The multiplier effect of having flexible capital, which reduces the ratio of dormant capital and allows businesses to scale and access the relevant flexible capital, is essential to boosting economic growth.

How do we lower the cost of capital? India's private markets will drive a major chunk of India's growth. The question is, how do we lower the cost of capital across the spectrum? A key driver will be regulations and investment vehicles. For instance, to provide impetus to India's private markets, it's essential to bring unlisted debt instruments at par with listed debt instruments. This is one example of how policy must cater to expanding access to low-cost capital for businesses.

At its core, why does access to flexible and low-cost capital matter for India's economic growth? We hear this fact thrown around. However, the question is, why should we care? The essential reason is that for India to boost its economic growth further, Indian businesses need to achieve further scale. Achieving further scale will require expansionary, flexible, and low-cost capital. But why does further scale matter? Scale matters since it allows businesses to produce their goods, IP and services at an increasingly lower cost. Let's look at the semiconductor chip industry as an example—an industry in which India has rightly taken giant strides of late. Over the last 60 years, the rapidly improving capacity of the chips coupled with scale led to prices declining rapidly for the same amount of computing power. Cheaper computing power allowed new use cases to emerge. These new use cases led to more demand for chips, thereby creating further scale and even lower costs at a per unit level, leading to even more use cases being possible, and the virtuous cycle has effectively driven chips to the epicentre of the world.

The biggest driver of India's economic growth story in the future will be more and more Indian businesses achieving scale in their offerings, lowering the cost of production, enabling more use cases, further driving scale in these businesses, and further reducing costs and driving use cases. The key to all this is access to plenty of low-cost and flexible capital. We saw what cheap data and mobile phones did in India. We saw what accessible credit and two-wheelers have done to economic growth since the 1990s in India. New industries are waiting to scale up to provide the next leg of rapid economic growth to India, undoubtedly one of the most important economies in the 21st century, perhaps even the most.

Disclaimer: In the article "S&P Global Raises India's FY25 GDP Forecast: While The Going Is Good, Does It Get Better? And How?" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.


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