In an interview with ETMarkets, Tanvee said: “The potential growth I estimate is somewhere between 6.5% to 7%. What we’re seeing is that India’s potential growth is benefiting from digitalization adoption, increased services exports, and now a manufacturing push” Edited excerpts:
What is your take on the recent GDP data? Has GDP slowed to a quarterly low of 6.7% in April to June quarter of the fiscal, compared to the 8.2% seen in the previous year?
I would say the growth in the June quarter was below our expectations. We were actually anticipating 7%. In fact, the growth momentum was expected to normalize this quarter, partly due to the heatwave conditions in April and May, as well as sluggish government spending.
We looked at the capital expenditure by both the central and state governments, which was partly affected by the parliamentary election. However, on a seasonally adjusted sequential basis, the momentum was still positive.
Economic activity, measured by real GDP growth, was up 1.1% quarter-on-quarter.On a growth value-added basis, which I think is a more interesting story, growth actually accelerated by 50 basis points to 6.8% in the June quarter. Looking at our full-year numbers for FY25, we have marginally lowered our forecast to 6.8% from the earlier estimate of 7%, partly due to two factors.First, we adjusted for this lower-than-expected economic growth in the June quarter, which was below our estimate of 7%. Second, we incorporated external headwinds. For example, our global economics team believes global growth is fading.We are seeing some slowdowns in the G3 regions—Eurozone, China, and the US. Last week, our China economics team even revised China’s 2024-25 GDP growth forecast down to 4.6% and 4%, from the earlier estimates of 4.9% and 4.6%.
Given these downside risks, we have factored them into our growth forecast. However, when it comes to India, we track high-frequency indicators through the UBS India Composite Economic Indicator, which I recently updated for July.
Although we don’t have all the data for August yet, for July, the indicator shows that on a seasonally adjusted sequential basis, the economy was up 0.8% month-on-month, compared to 0.6% in June. This suggests that the momentum, particularly in domestic economic activity, is still robust.
So, momentum in the domestic scenario in India is still holding up, but globally, we are seeing a loss of momentum. One of the reasons could be that the US Fed might cut rates in their next policy meeting to boost activity when growth slows down. Are we headed for a rate cut scenario?
That’s a very interesting question. As you rightly pointed out, a broader global easing cycle is expected to start as the Fed cuts rates. The critical point for September is that the market is divided on the quantum of Fed rate cuts this year, which will depend on incoming data, especially the Friday payroll report.
As of now, my US economist expects three 25 basis point rate cuts at each of the three remaining FOMC meetings this year.
As for India, our view is that there is no rush for Indian policymakers to cut the repo rate at this point, given the positive domestic growth momentum, as discussed earlier.
Additionally, we are seeing regulatory tightening to rein in unsecured retail lending, and inflation in the second half, as per our forecast, will still be above the RBI’s medium-term target of 4%, despite the base effect.
That said, if global monetary easing occurs, we do expect a 50 basis point cut in the repo rate, which we are currently forecasting to begin from the Fed policy, could be pushed forward to the December policy. This will be contingent on above-normal rainfall causing a downward surprise in CPI inflation data.
I was reading one of the reports from UBS, and something mentioned about comparing India with China. So, can India become a manufacturing powerhouse like China and potentially export like China?
Let me give a quick overview of how we are looking at India and China, and you’ll agree with me that this is one of the most discussed topics among investors and anyone looking at India and China. What we’ve seen in the past couple of years is that the economic fortunes and outlook of China and India have been divergent. China’s economic recovery has been weak after the pandemic, while India’s has been strong.
China is facing many structural challenges, including a rapidly aging population. In contrast, India has a relatively young and rising labor force and a far friendlier business environment.
In our report, we examined three key frameworks with implied questions. One of these is whether India can become a manufacturing powerhouse like China. Here’s a very interesting analysis.
We do not see India posing a serious challenge to China’s overall position anytime soon, as India currently accounts for only 3% of global manufacturing, while China accounts for about 30%.
However, India does have potentially favorable conditions for rapid growth in manufacturing, such as abundant cheap labor, improving infrastructure, and policies to attract foreign investment. Right now, India enjoys a favorable international image globally.
One thing that differentiates India from the rest of the region, especially other emerging markets, is that India has a large domestic market that is comparable to China around 2006-2007, while our per capita GDP is equivalent to China’s in 2000.
This will be key to rapid manufacturing growth in the years ahead. We believe India has a good chance of closing the gap with China and capturing some market share.
Good that you pointed out the domestic market because my next question is around that. Can India’s domestic markets grow like China’s did in the past two decades, with the rising middle class absorbing an increasing amount of global consumer goods and services?
If you look at India’s household consumption—I’m referring to the recent trend where, at least last year, consumption growth was muted—but over the past decade, India has become the fifth-largest consumer market in the world. Our view is that India will overtake Japan in 2026 to become the third-largest consumer market.
If India’s consumption continues to grow at a similar pace as its GDP, the country’s domestic market size could reach China’s current level many years before its GDP does. This is a very interesting trend that could emerge for India’s household consumption.
Looking at the near-term trends, what we’ve seen over the past year is that the demand for affluent, premium segment goods in India has been doing very well, but the demand for entry-level and mass-market goods has been muted, especially since the pandemic.
However, the latest GDP growth data for the June quarter suggests there is some recovery in household consumption, which is a positive sign. For FY25, we expect the affluent, premium segment to continue doing well, and we foresee that rural consumption will see a cyclical recovery in FY25 due to good monsoons, better summer crop sowing, and continued double-digit growth in public capital expenditure.
Additionally, we’ve seen an increase in social welfare spending by various states, particularly those that have recently had elections or are likely to have elections soon.
You touched upon the growth part. Will India’s growth have a similar impact on the global commodity and energy markets as China has had?
If you look at China, it has had an enormous impact on global energy and commodity markets over the past two decades. Compared that with India, we are already a large oil importer, and in recent years, our coal demand and imports have also increased.
However, we are unlikely to see similar demand growth from India as we did in China. India’s economy is less focused on industry than China’s. For example, the services sector accounts for more than 50% of our GDP, while the manufacturing sector accounts for only 13%.
Even if we expect that share to increase to 25%, I don’t believe the growth will be as capital and energy-intensive as it was in China. Furthermore, India’s own resource availability and different urbanization patterns mean that the country is unlikely to follow China’s rapid path, particularly in the import of base metals like iron ore.
Earlier in the conversation, you highlighted how India’s growth prospects look strong, despite a marginal dip in the last quarter. Moody’s raised its projection, and Fitch Ratings upgraded India’s rating from BBB-minus to a stable outlook last week, citing strong medium-term growth prospects and improving fiscal conditions. Are we in for a further upgrade?
In our base case, we do expect a sovereign rating upgrade by one of the three rating agencies over the next 18 months. However, we are closely monitoring the aggregate fiscal position for India.
While the central government is adhering to its fiscal consolidation roadmap, as seen in the recent Union Budget, there are concerns about fiscal profligacy in certain poll-bound states.
Upon reviewing the data, we noted that nine Indian states, either having held elections last year or set to do so this year, have announced significant increases in welfare spending and stimulus measures, leading to a widening of their aggregate FY25 fiscal deficit estimates by 20 basis points compared to FY24.
States such as Maharashtra, Madhya Pradesh, Telangana, Rajasthan, and Chhattisgarh have revised their FY25 deficit estimates upwards in their June-July budgets.
We believe this trend could weigh on state-owned capital expenditure over the coming years, as higher revenue expenditure is being directed toward populist promises.
This is a trend we’ll be watching to see whether the central government can monitor and address, or if these populist measures will exacerbate the overall fiscal position for India.
In fact, I’m sure you’ve heard the statement made by quite a few experts on TV and elsewhere that India is in a “golden decade.” Do you agree with that statement?
Rather than saying India is in a golden decade, I’d say that in the medium term — by which I mean the next three to five years — I do see India as one of the fastest-growing economies in emerging markets.
However, the potential growth I estimate is somewhere between 6.5% to 7%. What we’re seeing is that India’s potential growth is benefiting from digitalization adoption, increased services exports, and now a manufacturing push.
At the same time, what’s interesting is that while we believe the government’s focus on fiscal consolidation and supply-side reforms, such as boosting manufacturing, capex, skill development, and job creation — as highlighted in the recent budget — will bode well for India’s medium-term growth, we also need to see tougher reforms in areas like land and labor.
These reforms are really needed to take India’s growth higher than 7%. So, while India has potentially favorable conditions, we need more structural reforms to take growth to the next level.
Also, just a quick take on the rupee — what’s your outlook?
If you look at it, India’s external position is doing very, very well. Our external vulnerability has improved dramatically compared to the 2013 taper tantrum. We’re likely to see a significant BoP surplus this year.
The current account deficit has been very manageable — last year, it was less than 1% of GDP, and this year we expect it to widen slightly but still remain well below the sustainable limit. So, the INR is benefiting from a very stable external position.
Additionally, India’s inclusion in the global bond index is also leading to strong FII debt inflows. We expect that USD-INR should remain range-bound. We expect the INR to be around 84 by year-end, which is approximately where it’s trading now. So, 84 is our year-end target for the INR.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)