India — Shallow economic recovery to follow credit crunch

Economic growth in the world’s third-largest economy (in PPP terms) is expected to fall sharply to 4.8% in 2019, the lowest rate in eleven years. The slump owes to slowing consumption—long the main driver of India's growth—following the default of a shadow bank in late 2018 that severely crimped credit growth. While modest improvements in some high frequency indicators suggest that economic growth is finally bottoming out, financial sector stresses and excess capacity will preclude GDP growth returning to trend of around 7% p.a. over the near term. Non-performing assets of commercial banks are among the highest for any major economy and the labour market continues to be characterised by high unemployment and low participation rates. Moreover, weakening public finances and higher inflation is compromising much needed space to provide policy support. The 2020/21 budget offered only modest stimulus amid an ostensible commitment to fiscal discipline. The IMF warned recently that ‘India’s debt—among the highest in emerging markets—must be reduced’.

However, positive demographics and competitive unit labour costs, alongside a more favourable corporate tax regime, should reinforce longer term growth and assist with the goal of lifting India into Australia's top three export markets. Already, Australian exports to India have more than doubled since the trough in FY2014 (Chart). In particular, India is Australia’s second largest education export market, with 115,607 Indian students enrolled in Australia in 2019, 29% higher than the previous year. Agribusiness, resources and energy, tourism, health, financial services, infrastructure, sport, science and innovation are other promising sectors where Australia has competitive advantages.