Desai says India will be one of the rare exceptions which will stop borrowing to pay interest in about three years and will move to primary balance. When that happens, government debt to GDP will fall because nominal GDP in India is still 10-11%. It will create major space for the private sector to re-lever and a major lending boom in the private sector can be expected, accompanied by a big capex cycle.
There are too many moving parts. There is a Trump trade one side, there is a long live China trade on one side. And there is a sell India expensive trade or quit India movement which FIIs have adopted. A lot of things are shaking in the world right now?
Ridham Desai: I am in the sidelines of a summit in Singapore. Coming to your question, yes, of course, there are moving parts. There is nothing different from any point in time in life. There are always moving parts, except that the parts that are moving keep changing. Some surprises and curveballs come at you. But from an India perspective, there are three imponderables. The first one is what happens to global growth next year, which in turn will depend on how the new president frames his policies.
The second is what happens to India’s growth. There is a lot of scepticism following the slowdown that we have witnessed over the last six months, that India is going through a prolonged soft patch of growth.
The third is that foreign portfolio investors are selling and what is the demand that is there for Indian equities and the valuations being one of the aspects relating to that. In the first part, global growth remains a bit of an imponderable. We will have to wait for the US President to roll out his policies. India on a relative basis is okay and therefore that relative trade favours India. The absolute trade depends on the extent of the policy that gets rolled out in terms of tariffs. Our base case is that global growth will still be okay next year. A bit of a slowdown from where we are today, but not anything material. There is an offset coming from the Fed rate cuts that we expect. So that should be fine.
We are right about our forecast, and India is in a good place. So, we would not have to worry about it. But in case we reach a bear case scenario where the policy rollout is far more restrictive than we are currently assuming, then that challenge will emerge especially in the second half of next year.
With regards to India’s own growth, the soft patch was temporary. It was a very peculiar one. The first quarter of this fiscal year was obviously hurt by elections. The second quarter was hurt by incessant rains in August and the advancing of Shradh to September. The government cash balance with the RBI by the end of September had almost touched Rs 3.6 trillion, or Rs 3,60,000 crore. That was unprecedented; that is the extent to which the government had deferred expenditure. Central plus state governments are 29% of GDP and the expenditure for the central government fell by 0.5% in the first six months of this fiscal.
As a consequence, the fiscal deficit was tracking 3.4% versus a target of 4.9% and versus last year’s number of 5.9%. So, you can imagine what a drag it produced in the economy. Guess what? All of that is behind us. The government’s cash balance is now down to sub-Rs 60,000 crore. Over and above the taxes they collected between 1st October and now, they have spent Rs 3 lakh crore. So, the economy should actually be doing quite well now. On top of it, we have a very strong summer crop coming into the market, a 5.7% growth in the kharif output. So, farm incomes are looking good. The wedding season started on Kartik Purnima a week ago and that is promising to bring a much higher growth rate versus last year because it is a longer wedding season. I dare say, this quarter ending December is going to be very strong and I think the scepticism about any slowdown in growth is going to be quickly behind us.
RBI has shifted the stance and liquidity in the system is now more or less in surplus which augurs well for the growth prospects. So, I do not think there are much domestic worries for us. And with respect to the foreigners, I do not think this was an India-specific sell down. It was an emerging market trade as the US dollar was pricing in President Trump victory and it was rallying through the month of October. Emerging markets saw major outflows. India and China put together almost half the EM index and they both saw major outflows. China’s outflows exceeded India. That may have been done now. The correction that we got was a healthy one and we are probably at the end of that correction.
What is the chatter you are picking up on the sidelines of the summit? A large chunk of the FPI selling is now behind us. You just talked about how the selling was much an emerging market trade and not an India-specific trade. We have seen the maximum amount of selling year-to-date and the outflows are at a 10-month high. A large chunk of that is now behind us?
Ridham Desai: The conundrum is that at 9:15 every morning, there is a domestic bid on the screen. There are only two participants in the market – domestic buyers and foreign portfolio investors. So, both cannot be buying at the same time. Somebody needs to sell. So, unless the corporate sector steps up its activity and brings more issues into the market, I do not see the foreign investor selling totally going away.
The intensity of the selling can ebb, which in fact has already ebbed, but it is mathematically not possible for everybody to be buying in the market. Somebody needs to sell. The question that I will ask you is which one are you more comfortable with? If domestics start selling to allow foreigners to buy, would that make you more comfortable? I do not think it will make me comfortable. We are better off with domestics buying rather than foreigners. We would not want the same intensity of selling and I do think the intensity of selling has maxed out.
Now, if corporate issuances continue to pick up, then you will see foreign buying come back because then they will have room to actually bid for stocks. In the meanwhile, as we know, domestic buying actually made record highs as well as much as foreign selling made record highs. And I actually focus on that a lot more because for months now a lot of investors have been quizzing me about the sustainability of the retail bid, that if the market corrects 10% retail will panic. Guess what? They did not panic. They actually backed up the truck and loaded it. That is a very comforting sign for us, actually not so much for me, but for those who have been sceptical about the sustenance of the retail bid.
One big assumption for FY25 was government spending and something which you alluded to. If things normalise, which is that the government will increase their government spending and they will go back to that budget capital expenditure target, where do you think the market could be delighted? Could it be infrastructure, cement or both?
Ridham Desai: The government has very clearly articulated its strategy in February itself in the interim budget and then reiterated that even more strongly in the final budget that it is stepping away. That the heavy lifting that it did during COVID when private demand was weak because of the extraneous factor of COVID, is now done.
The fiscal stimulus that it gave to the economy is therefore behind us. So, very clearly, we are on a path of fiscal consolidation. In fact, it is a very bullish story for equities because it is possible that in the next three years the Indian government will go into a primary balance. Your viewers need to understand what that means. Currently, the Indian central government is in a primary deficit, which means it is borrowing money to pay interest.
If a corporation did that, you would call it bankrupt. By the way, almost all the top countries in the world are in primary deficit. They are all borrowing to pay interest. India will be one of the rare exceptions on the planet which will stop borrowing to pay interest in about three years. When that happens, government debt to GDP will fall because nominal GDP in India is still 10-11%. It will create major space for the private sector to re-lever. Private sector borrowings or debt is at cycle lows. I expect a major lending boom in the private sector, which will be accompanied by a big capex cycle. That is how India’s growth template pans out over the next three years.
Coming back to the F-25, the thing is the government spending was lagging GDP, that is how fiscal deficit consolidates. And in this year, the government was hoping and anticipating that the private sector will step in. We did have a few extraneous factors that have hurt this narrative but those are all behind us and we should see a catch up in the second half. Now, on the mix of spending, clearly the government is focusing on infrastructure, even though it is losing share in GDP, nominally infrastructure spending will still go up and that will remain the strong part of the government spending story. It is not re-distributing taxes.
I think there is scope here to cut indirect taxes as you go forward because government tax collections are very strong. But that is not so easily done as it was in the past because now GST rates are to be determined by the council and the council will have to come to a consensus and states have to agree that they are ready to give up some revenues in order to restructure GST. But if that happens sometime next year, it will be very bullish because it will actually stimulate a lot of private consumption.
What do you believe are going to be some of the key risks when it comes to the domestic economy back home?
Ridham Desai: The domestic economy does not have that many risks in the immediate future. If we are focused only on 2025, the risk is largely global. The risk is that the global growth surprises to the downside and that is a material risk for India because 21% of India’s GDP is exported. So, if global GDP growth slows down, it will inevitably slow down domestic growth as well, so that is the key risk factor that we have to keep focused on in 2025.