Gearing goldilocks growth
India is in the grip of, what experts dub as, a rare period of goldilocks economy. This is a state where economic growth is strong, inflation is low. Contrast this with an overheated economy, i.e., high-growth high-inflation, stagflation (low-growth high-inflation), or a cooling-off effect (low-growth low-inflation). While this is an ideal state that any nation or policy-makers desire, the question is whether it is sustainable or momentary. At present, the signs are positive, as growth seems to be on an upward trend in the first two quarters of this fiscal year, and inflation is at an unbelievable low. Imagine that food inflation, the scourge of politicians, is negative.
While one needs to celebrate this period, there are concerns. The worries relate to how this upbeat moment can affect policy-makers, regulators, investors, and consumers. The first two can get carried away, and come up with policies that may have a negative impact in the medium term. The last two can be swayed with decisions that lead to later losses. In both cases, growth will be stymied, inflation will rear its ugly head, and the economy may be derailed. Hence, these sections need to be more careful than ever, and take steps to ensure the stability and continuity of the ongoing momentum.
For Finance Minister Nirmala Sitharaman, who will present her Budget before the third quarter growth figures are out, the trick is whether to assume sustained growth, or heed the advice of the naysayers, who predict slower growth in the next two quarters of this fiscal. The Reserve Bank of India (RBI) has hinted at such a scenario in its last bi-monthly policy. Others have indeed upgraded India’s growth figure for the entire year, but they still contend that the numbers will be around six per cent each over the next two quarters, rather than around eight per cent in the first two.
Hence, it is imperative for the finance minister to keep her head steady, and not go overboard. The tendency in the forthcoming Budget, given that key state elections are due, will be to spend more on welfare schemes, and give incentives to the poor to woo the electorate. There will be pressures from the industry to ease the policy environment to further propel growth. Investors will demand more liberal policies to help them take advantage of the high growth, which will push up corporate earnings, and stock valuations. Consumers will demand more money in their wallets.
As it is, there is a growing and loud demand for the RBI to cut interest rates at its next meeting, which is due early next month. This, say some experts, will aid industry, and private investments, and push up demand in crucial sectors. However, as the monetarists contend, more money in the system can pull up prices, and stoke inflation, which has a life of its own. Past experiences show that it does not take long for inflation to rise from low single-digits to high ones, or even double-digits within a season or two. Although the central bank has reiterated that inflation is its main priority, it needs to stick to the dictum, and not waver from it.
Most central banks are invariably caught in a quandary. If they do not reduce interest rates in such, and other situations, they are criticised for being too conservative and risk-averse. If they do, they are left holding the baby if the prices shoot up. It is a delicate balance in a sensitive game. The RBI has announced several policies to ease the money flows, and has cut rates in the past. As it admitted, there is a lag effect of the latter, and the former were announced less than two months ago. It is in a sense at a policy crossroad.
Investor exuberance has revived. It started with the IPO (Initial Public Offering) market, as the secondary markets remained depressed for most of the calendar year. But now, the latter too has perked up in the recent past. Brokerage houses, and experts have predicted that 2026 may witness a revival in stock prices, re-rating of stocks, and the broader indices will touch unexpected highs. One estimate puts the Sensex at 1,07,000, or a quarter higher than the present level. Despite taking money out, foreign investors seem to have renewed their faith in the India story, albeit slowly.
GDP growth is likely to ignite corporate earnings in the future. This will influence stock prices. But current valuations are still high, especially in the tech sector. Indian stocks are trading at price-to-earnings which are multiple times the tech stocks in the US stock market. Hence, investors need to be choosy. They need to avoid high-value stocks. At the same time, they need to steer off stocks, which seem attractive but have weak balance sheets. In an atmosphere buzzing with optimism, especially after India’s numbers for GDP growth in the first two quarters, it is tough to remain logical.
We have said it time and again (see Our Take on this page) that consumer sentiments have revived, and are on a high. While this is great for the economy, there is a flip side. Armed with higher disposable incomes, low prices due to low inflation, availability of products, and herd mentality, there is a desire to overreach. In such a scenario, buyers tend to overspend, and pick up things that they do not need. For example, one may shift to the more expensive high-end goods, or replace things that do not need to be. There can be a pattern of conspicuous consumption across classes.
Hence, savings take a back seat, there is an urge to rush after high-return investments, and most are comfortable with high credit. Of course, while people profit from them in the short run, things can go awry quite quickly. If growth stutters, stock markets sputters, and incomes stumble, the best-laid plans unravel. It is safer to think through the decisions, and not rush headlong. This is pertinent because of the FOMO factor. No one wants to miss out on the good times. India’s goldilocks moment presents a picture-perfect time to maximise returns, and grab the best deals. So, one cannot ask people to be patient. In any case, not many are likely to listen. Still, it may be better to take a few deep breaths before taking crucial decisions. Clearly, each section of beneficiaries needs to take deep dips in the ocean of growth. Do not drown, and remember the swimming lessons.
