We had a strong first quarter. How do you see the economy faring in the face of several challenges? And are we kind of settling at a 6% medium-term growth rate?
Our medium-term growth is at about 6.5% – we are comfortable with that and, in a good year, we can even be heading closer to 7%. Private capital formation is no longer a topic of speculation. We are seeing it in bottom-up corporate cash flow data; we are seeing it in the RBI’s investment intentions data put out in the August monthly bulletin; and third, we are hearing it from corporates themselves as part of the quarterly earnings reports, announcements and press conferences. Bank credit growth has again picked up, including in MSMEs and agriculture. So, we are comfortable maintaining a central tendency of 6.5%, not only for this year but going forward. Some headwinds or others will always be there. In fact, last year, we had much stronger headwinds with commodity prices, crude prices, war, trade disruptions, etc. Services are offsetting quite a bit of the stagnation in merchandise exports. Of course, we need to see the impact of August’s deficient rainfall, but we should also acknowledge the fact that we have moved a long way away from monsoon dependency. Well, there is work to be done. However, the monsoon is more of a headline and sentiment-dominated impact. Water storage levels are 95% of the 10-year average and 79% of last year’s average, crop sowing has been quite okay, and last week, the IMD (India Meteorological Department) said September is expected to be normal. So, in terms of FY24 growth, we still see the risks for 6.5% to be symmetric on both sides.
In terms of challenges or headwinds, high US interest rates are significant. How do you see that affecting India?
Ultimately, what matters to us is that within the emerging market space, India’s macroeconomic stability has been recognised and is being recognised by investors who walk through this room and go out. Therefore, I do not see the Fed interest rates playing as big a role as they played when we were more vulnerable.
If anything, what we should be thinking about is the impact that higher interest rates will have on the US stock market, which has tremendously proven resilient. Something or the other keeps the buoyancy up. Last year, towards the second half, anticipation of easing, and then now it is AI-related stocks. Therefore, the tighter financial conditions in the US have not fully materialised, mainly because of the wealth effect and the stock market buoyancy. In addition, if that tightens, then yes, there will be a spillover regardless of monetary policy stance. There will be a global spillover in terms of asset price correction, stock market corrections, and so on. In addition, given the much stronger, wider retail participation in India in the last three-four years, that might have a sentiment impact or some spending impact. However, now, nobody has quantified them, and I do not think we should overstate that risk factor. Therefore, long story short, I think the Fed, even if they hike by another 25-50 basis points, I do not see that having a significant impact on our macro outlook. We talked about the monsoon not having as much of an impact as earlier. But climate change is a bigger risk… That’s a medium-term issue. The medium-term risk factors for India would be to secure energy supplies in the context of what is the global discourse on climate change and emission mitigation being the most important focus of the developed world. Fossil fuels are critical for affordable energy because people do not take into consideration the role subsidies play in renewable energy and the technological shortcomings we have for storage and grid stability etc. If you consider all those things, then the cost advantage of renewable energy is not there. You also have to ensure medium-term critical minerals and rare earth supplies and so on. So, we should be looking at nuclear energy, green hydrogen, and many other sources, not just renewable, as an alternative to fossil fuels. This is a transition that will take time, but we have to ensure that, in the interim, we have enough energy supply to grow. That, to me, is the most important policy challenge for the next 10 years.
How do export restrictions fit in with long-term trade policies, especially with regard to the farm sector?
Look, there are trends, and there are fluctuations around the trend. Many countries have also imposed restrictions depending on local circumstances. So these are inevitable.
What about restrictions on laptops and other devices? How does that play out in terms of long-term competitiveness argument?
I’m not sure we should immediately jump to the conclusion that they’re slipping back into controls. There could be specific responses, and I think anyway industry has represented. They have deferred licensing requirements by three months. So, we should wait for MeITY and the commerce ministry to take a call on this.
We have a kind of carrot-and-stick approach-PLIs and restrictions-to attract manufacturing investment. The PLI scheme has also been criticised by some who say India should focus on services…
Notwithstanding criticisms… and criticisms matter more than who criticises. But even from the substantial part of it, I really don’t understand the arguments that India has to concentrate on services. I don’t think a country of India’s size needs to focus exclusively on one thing. We need a manufacturing strategy, and there is scope for it. For example, even in states like Tamil Nadu, footwear production has come to India rather than going elsewhere. These are all part of the diversification strategy that countries and manufacturers are adopting. So, there is room for manufacturing. Second, today, global capability centres are getting located in India. That started 30 years ago with fixing bugs in software code. So, you don’t become a fully-grown adult on day one. You have to come through the process, and that is how the software industry matured. Similarly, today, if you start out with assembly and a relatively lower value addition, that is how it is, and that is how it will be. It is still better than giving doles and handouts to people. Women are being employed in many of these smartphone assembling (units). You cannot keep on waiting for the most ideal circumstance. You have to start, experiment, and that will set up its own positive chain reactions. So the criticisms are misplaced.
Moody’s expressed concerns on debt management. How do you see the situation?
India’s public debt to GDP ratio hasn’t deteriorated compared to the last 15-16 years. In the Economic Survey, we showed scenario analysis wherein, had the nominal GDP growth been steady at 10%, how the debt and the deficit ratios would have looked like. Between 2020 and 2022, they could have come down by another 5-7 percentage points already. The last decade’s growth rate was on the lower side because of all the balance sheet issues that we are familiar with. So, there is going to be a more meaningful reduction in India’s debt ratios going forward than what the agencies are willing to acknowledge. Their one important argument, which I will concede, is that India’s interest payment as a percentage of tax revenues is on the high side. That is obviously a legacy of the previous accumulated debt and specifically because of the contraction experienced during Covid. I think what should happen is going forward, you know, the proceeds from asset monetisation and privatisation initiatives should be earmarked for reducing debt and bringing down the burden of interest payments on taxable revenues.
We have so much evidence of tax compliance going up both on the direct and indirect side. But why is it not reflected in tax-to-GDP ratio?
If you look at the tax-to-GDP ratio considering states’ numbers, for an economy at this level of per capita income, India’s tax-to-GDP ratio is not low. It is steadily rising. So long as it is steady and rising slowly, that’s better.
In Q1 numbers, there is hardly any difference between real and nominal GDP…
It was because of the major collapse in the Wholesale Price Index (WPI) from last year, given last year’s big spike in commodity prices. I don’t read too much into it on a one-quarter basis.
Should we be concerned about the goods trade deficit?
Overall trade deficit, if anything, has shrunk. And merchandise trade deficit, we shouldn’t be looking at bilateral trade deficits only. Some of the initiatives we have taken on manufacturing and increasing domestic supply capabilities will begin to manifest themselves in the data going forward. So, at the moment, the ex-petroleum deficit is not a big concern.
What about inflation?
Earlier, in August, when the RBI had its monetary policy meeting, they updated inflation projections, and I think that sounds reasonable to me. They maintain 6.5% GDP growth in spite of updating their inflation projection for the rest of the financial year. So that seems alright to me.
Fiscal deficit numbers at the end of July were the other higher side. How do you see them?
That is because of this emphasis being put on capex this year, but it is still lower than the last five-year average. Again, just to remind you, we have a 10.5% nominal GDP growth assumption. Then we have a buoyancy assumption that is lower than the last five years or even longer-term buoyancy averages. So we are comfortable.
We’ve seen competitive populism in states going for election. What does it mean for states’ fiscal situation and the fact that when the Centre is trying to push for infrastructure creation, the larger state expenditures seem to be moving toward revenue?
No, no, that’s not true. These are all election-related announcements, and by the time the parties are elected, and… after they implement them, you can look at their fiscal impact. All that we have seen in the data in this financial year is that the states have also ramped up capex and their deficit numbers are well within the parameters they have committed to. So poll promises and how they translate into actual impact on fiscal numbers, that’s a huge distance to be crossed. There is no need to presume certain conclusions at this point.
