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  • Writer's pictureTikona Capital

A decade of “Animal spirits” for INDIA?

Updated: Sep 25, 2023

World GDP bounced back after an impact of pandemic and is likely to see a normalised growth rates in 2023, after impact of rising energy and commodity prices are expected to be digested in 2022. India GDP grew at 5.4% in Q3FY22 and is expected to be around 7.5% in FY23 (vs FY22 8.9%) and accelerate to ~8% in FY24 as per Asian Development recent projections. However, looking at the long-range GDP growth, rolling 10-year basis India’s GDP has been accelerating vs the large economies of the world as can be seen from the chart below. China, which saw a double digit 10-year average growth rates for a lengthy period during 1990 to 2010 backed by manufacturing boom and growth-oriented policies, has been decelerating in the recent past. India’s GDP growth is on an acceleration path (on an ex-pandemic basis) and is likely to be recovering to long range trend of ~6-7%, such a growth is expected to be the fastest within the large sized economies of the world.

Rolling 10 years till 2021. FY23 projections

Economy and Animal Spirits

Famous British economist, John Maynard Keynes, coined the term “Animal Spirits” to describe the process of human behaviour and how people arrive at financial decisions, in times of economic stress or uncertainty. In Keynes’s 1936 publication, The General Theory of Employment, Interest, and Money, he speaks of animal spirits as the human emotions that affect consumer confidence.

In an article by The Economist, as per Keynes, essential ingredient of economic prosperity is confidence. According to Keynes, animal spirits are a particular sort of confidence, "naive optimism". He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". Where these animal spirits come from is something of a mystery.

A few points to ponder over to see if this mysterious Animal spirit is unfolding in India?

Increased Compliance: GST collections at new highs at 1.42 lakh Cr and the average monthly gross GST collection for the last quarter of the FY 2021-22 has been Rs 1.38 lakh crore. The Finance Ministry attributed the collection to economic recovery, anti-evasion activities, especially action against fake billers. GST collections have reached 6.7% of GDP in quarter of March 2022 vs 6.1% in Quarter of Dec-18, implying improved tax compliance thereby right channelling of the finances in the economy. Most countries have seen accelerating growth with improved tax compliance.

Electronic permits for goods shipment within and across states in March’22 have shot up to 78.1 million, the highest since November 2020 for which data is readily available, indicating that Goods and Services Tax (GST) revenue collections in April’22 could surpass the all-time high seen in March’22. Fastag penetration stands at 96.5% on National highways implying all the economic goods movement can be tracked for better planning as well as any course correction if required on slowing traffic growth in the economy. Given the E-way bills linkage to GST further compliance can be strengthened to improve tax collections in the economy.

Incentivised manufacturing: Product linked Incentive (PLI) scheme is expected to boost local manufacturing into the country. Scheme are launched in various sectors including Advance Chemistry Cell (ACC) Battery, Critical Key Starting materials/Drug Intermediaries, Pharmaceutical Ingredients, Food Products, High Efficiency Solar Modules, IT Hardware Products and devices, Mobile Manufacturing, Specified Electronic Components and many more sectors. With an objective of import substitution to reduce dependence on imports, to build expertise in sunrise sectors where India can take the lead and strengthen sector capabilities to retain competitiveness and gain market share.

The overall investment under PLI is estimated at ~USD50bn, which is likely to be spread out over 3-4 years. An average investment of USD12-15bn a year likely to add 1.5-2.0% of the gross fixed capital formation (GFCF). The potential projected output of USD100bn a year under the PLI is expected at ~7% of corporate sector manufacturing output.

Vibrant Start-up Environment: Successful listing of digital platforms like Zomato, Nykaa, Cartrade Paytm etc instil confidence to upcoming start-up Entrepreneurs. Start-up ecosystem has been vibrant with number of unicorns increasing every month, by 2025 India is expected to see 150+ unicorns from current 58, thereby creating a healthy entrepreneurship environment. Top ten unicorn start-ups are already worth more than $100bn. Between 2014-20 ~$70bn has been invested in start-up and further investment of up to $100bn is expected in the next 5 years. It is project that by 2025 with more than one hundred thousand start-ups are likely to employ about 3.25mn people and Indian start-up ecosystem will be next only to the US. Media shows like Shark tank has already demonstrated how engaged is non-metro population in their entrepreneurial journey. Such shows are further fuelling the entrepreneurial DNA of Indians.

Connected One India: Indian population is getting connected Mobile penetration at 79% of population with 45% internet enabled and rising. With Aadhar penetration reaching more than 95%, bank account penetration at more than 75% with online banking to reach 50% by 2025 most Indians as well as Indian economic activity is getting formalised. With one of the largest vaccination program run by the Indian govt, more than 60% of population is fully vaccinated, demonstrates India’s digital capabilities as well as has built an enabling acceptance to assemble digital health records. All such large-scale initiatives are creating a huge heap of data which can used to create insights for efficient and enhanced public policies. Further, India is getting connected through improved infrastructure – Road, power, water which will fuel the above-mentioned network effect of the ecosystem.

George Akerlof and Robert Shiller through their book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, writes about five distinct aspects of animal spirits and how they affect economic decisions—confidence, fairness, corruption and antisocial behaviour, money illusion, and stories:

  • Confidence and its multiplier; Changes in confidence will result in changes in income and confidence in the next round, and each of these changes will in turn affect income and confidence in yet further rounds.

  • Fairness: Considerations of fairness are a major motivator in economic decisions and are related to our sense of confidence and our ability to work effectively together.

  • Temptation toward corrupt and antisocial behaviour and their role in the economy: Capitalism has a downside. It does not produce what people really need; it produces what they think they need and are willing to pay for.

  • Money illusion is another cornerstone of theory.

  • Finally, sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays a significant role in the economy.

In our view, Indian economy is going through confluence of the factors to drive Animal Spirits for an extended period.

Confidence: Indian leaders including diplomats, politicians and business leaders are standing up to the issues as well as business opportunity differing on views from the western developed world either it be subject of climate change, technology, pandemic or global peace. Such confidence at global platform and the multiplier effects are likely to be long lasting. We are also seeing the confidence of Indian investors in equity markets which have been able to absorb the FII outflows during the last six months of more than ~1.90 Lakh Crs.

Fairness and regulation of corrupt and antisocial behaviour: As the country evolves into one India with one tax – GST, one identity (Aadhar), enabled infrastructure banking, telecom, road, power, water and government services, fairness and equality is expected to be strengthened further. Compliance is already on the rise with higher GST collections as well as rising direct tax collections. This is likely to further fuel the confidence.

Successful Stories and Money: Indian start-up ecosystem is making stories worldwide and creating wealth (Money). Success of the ecosystem will ensure India focus towards a $5tn economy in the coming decade. PM Modi had unveiled Amrit kaal - a new roadmap for the country for the next 25 years to derive the best in every field. Better the lives of citizens, lessen the developmental divide between villages & cities and improve ease of doing business in India with trust-based governance. Near term Risks!

While the future is always unknown, we can only make an attempt to prepare taking into consideration the available information, the emerging trends and possible behaviours. While we continue to remain constructive immediate challenges of inflation, interest rate and liquidity are challenges to be navigated until they subside.

Rising energy and commodity prices are fuelling Inflation and may have spiralling impact. We have seen moderation from the recent highs and India has to an extent managed to procure fuel at competitive prices from Russia. Supply chain issues are currently impacting the availability; however, they are likely to be resolved in 2022 with better planning and evening out of recovery.

The RBI has managed the interest rate as well as liquidity situation quite well vs the global economies. Giving priority to the recovery as well as growth and keeping the impact of interest rate rise as well as tightening on a gradual path is likely to ensure the resilience of the Indian economy. Any unforeseen events can be managed well in scenarios of fragile geopolitical situation, rising interest rate and tightening liquidity.


In our view India is likely to enter a phase of Animal Spirits achieving its target of $5tn over the coming decade. Investors must look forward to opportunities that are likely to gain out these emerging trends. While our preferred themes of Digitalisation, exports, manufacturing, and discretionary consumption are likely to gain from animal spirits in the economy, incrementally Men will be separated from the Boys. Investors will have to be selective towards businesses where leaders are building seamlessness and scale with technology, talent and ecosystems.

Sumit Poddar

Chief Investment Officer & Smallcase Portfolio Manager

Tikona Capital

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