India’s Economic Rebound and Growth Prospects

India’s economy is rebounding, with the business cycle upswing becoming more pronounced and widespread. Although GDP growth slowed slightly in the second quarter, moderating to 1.1% quarter-on-quarter (QoQ) from 1.3% QoQ, this was largely due to a contraction in government spending, inventories, and exports. Importantly, both consumption and investment spending grew robustly, marking the fastest pace since late 2021 and early 2022, respectively. Leading indicators remain positive, and the economic fundamentals are supportive of continued growth.

The corporate profit cycle is in full swing, with company balance sheets in rude health, positioning businesses to increase investment. Corporate debt-to-equity ratios have declined significantly, and corporate debt as a percentage of GDP is well below global averages. Consequently, the debt service-to-equity ratio is now below the 2007-2023 average, and the interest coverage ratio remains stable—44x for IT, 7.5x for manufacturing, and 1.7x for non-IT services. Infrastructure companies, buoyed by optimism, are increasing their spending, according to the RBI’s Q1 FY24/25 Services and Infrastructure Outlook Survey. Capacity utilisation is tight, and order backlogs are rising. Additionally, monthly data shows upward trends in the capital goods sector and the eight-core industry infrastructure index.

Public sector banks, which dominate the financial sector, have never been stronger. Non-performing loans (NPLs) are at a 12-year low due to a sustained reduction in new NPLs and higher write-offs. Provisioning levels are at their highest since 2007, and asset quality among large borrowers continues to improve. The sector is well-capitalised, with average capital adequacy ratios of 16.8%, comfortably above the RBI’s 11% regulatory minimum. Private credit is growing at double-digit rates, with strong borrowing demand across industries, services, small and medium enterprises, large corporations, mortgages, and big-ticket consumer goods.

High-frequency consumption data, including three-wheeler and passenger vehicle sales, consumer goods output, and retail sales, moderated in July and August. However, this softening is likely temporary, given the rising household credit demand—a leading indicator of consumption. As inflation slows (down to 3.7% YoY in August from a peak of 7.4% in July 2023), household purchasing power is also improving.

India’s growth trajectory extends beyond a typical business cycle recovery; it represents a multi-year growth story. A decade of steady structural reforms has transformed the business landscape. India’s World Bank Ease of Doing Business score has improved significantly, now at 71.1, well above the East Asia & Pacific average of 63.3.

Key reforms such as the 2016 Insolvency and Bankruptcy Code and the RBI’s 2018 Resolution of Stressed Assets Framework have been critical in restructuring the corporate sector and tightening bank regulations. The implementation of GST in 2017 and the corporate tax cut from 30% to 22% in 2019 have unified tax rates across states, enabling businesses to scale, enter new markets, and compete globally. Furthermore, the passage of four labour codes in 2019-2020 addressed key hurdles to growth and foreign investment. The 2020 Production Linked Incentive (PLI) scheme also opened doors for investment in key industries such as advanced manufacturing, electric vehicles, renewables, and high-tech sectors. The government’s budget is focused on infrastructure investment, with substantial spending on roads, ports, airports, and railways, as evidenced by the growing share of capital expenditure in total federal spending.

Despite concerns about political uncertainty following this year’s general elections and the potential for fiscal slippage, these fears are overstated. India’s pro-growth agenda is deeply rooted, and governance is shifting from central control to competitive federalism and capitalism. The role of the government has evolved from being a growth driver to a growth enabler, creating economic incentives to attract private investment. With reduced fiscal transfers from the center, state governments are now motivated to generate growth and create jobs by attracting investment, especially given the expanding working-age population.