India’s economy is strong enough to weather high US interest rates, chief economic adviser V Anantha Nageswaran tells Deepshikha Sikarwar and Vinay Pandey in an interview. The medium-term risk for the country is securing energy supplies while the merchandise trade deficit is not a concern, he says. Edited excerpts:
We had a strong first quarter. How do you see the economy going ahead 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%. I think 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 that they have 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 MSME sectors and agriculture. So, I think 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 the monsoon dependency. Well, there is work to be done. However, monsoon is more of a headline and sentiment-dominated impact rather than a real 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 yesterday (Thursday), IMD 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 a significant one. How do you see that affecting us?
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. Our current account indicators are much more manageable numbers, less than 2% of GDP. Secondly, our inflation overshoot last year was far lower than the inflation overshoots other countries suffered, even advanced countries. The proof of the pudding is in the fact that the 10-year G-Sec spread to the US 10-year Treasury has actually compressed. It has come below 300 basis points rather than staying above 300 basis points. Normally, what happens is when central banks in the developed world tighten, especially in the United States, the spread — it is like a high beta variable — the spreads widen more than they shrink when interest rates are lowered. That has not happened in the case of India, even after the Fed chair Powell’s Jackson Hole speech –the US ten-year treasury and the Indian 10-year G-Sec yield, the spread has compressed. 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 to all kinds of shocks. 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 3-4 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 hide by another 25-50 basis points, I do not see that having a significant impact on our macro outlook. Not even any impact on currency…
I think the dynamics have changed quite a bit. If the Fed is hiking by 25 or 50 basis points from here, it might also be the case that the inflation rate in the US is proving to be stickier. Then I think the real rates of interest may still be not very high in the United States. If anything, it will further enhance the prospect of an economic slowdown in that country, and the markets would anticipate that if interest rates go up from here. So all told, I don’t see these as major risk factors.
We talked about the monsoon not having as much impact as earlier. But climate change is the 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 yet 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.
In terms of inflation measures, you know these export restrictions have been imposed. How does it sit with the long-term export 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.
In the same vein, what about the restrictions that we have imposed on the laptops and all? How does that play out in terms of the long-term competitiveness argument, the fact that people are saying it is regressing back into the earlier regime?
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 3 months. So, I think we should wait for MeITY and the Ministry of Commerce 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 that 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 to the exclusion of the other. I think 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. You cannot keep on waiting for the most ideal circumstance. You have to start; you have to experiment, and that will set up its own positive chain reactions. So the criticisms are misplaced.
We just saw some concerns that Moody’s expressed on debt management. How do you see the debt 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. Generally, if you look at the last 10 years, the deflator averages about 4.7%, close to 5%. You are looking at 6.5-7% nominal real GDP growth, and you add a 4.5-5% deflator on average; we are looking at 11-12% nominal GDP growth. The cost of sovereign debt is 7% even in these circumstances where policy rates have gone up by 500 basis points in developed countries; we are talking about a 4-5% gap between the nominal GDP growth and the nominal cost of borrowing. The last decade’s growth rate was on the lower side because of all the balance sheet issues that we are familiar with. So, I think there is going to be a more meaningful reduction in India’s debt ratios going forward than what the agencies are willing to acknowledge at this point. 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, yes. That is obviously a legacy of the previous accumulated debt and specifically because of the contraction that we 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. Also, simultaneously, as the infrastructure and supply-side capabilities of the economy improve, the inflation overshoot problem will become less and less of a concern. That will also mean less need for monetary authorities to keep tightening as much as they did in the past. That will also reflect in the cost of borrowing for the government apart from these. So, if you consider all these things, the profile for debt and deficit ratios going forward will be far better than what the credit ratings agencies are willing to give credit for, at the moment. We are talking to them about these aspects.
We have so much evidence of tax compliance going up both on the direct and indirect side. But why is it not yet reflected in the 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. If it rises fast, you will ask the question, why should the tax ratio be rising so fast? It is a drag on economic activity — that criticism will also arise. So, I’m rather comfortable with the slow and steady increases rather than sharp increases.
In the first quarter number, 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 to this 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 that we are running?
Overall trade deficit, if anything, has shrunk. And I think merchandise trade deficit, we shouldn’t be looking at bilateral trade deficits only. I think 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.
In the 6.5% GDP growth that you were saying for FY24, does it factor in the domestic tighter money conditions?
The 6.5% GDP growth does take into consideration the current state of monetary policy.
What about inflation? How do you see the 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 the 6.5% GDP growth in spite of updating their inflation projection for the rest of the financial year. So that seems alright to me.
Has the recent spike in inflation pushed back monetary policy easing?
I don’t comment on monetary policy.
How do you see the macroeconomic balances at present?
I’m happy with the current state of the macroeconomic parameters and the network stability we have in spite of the continuing challenges we face globally and domestically with the weather, climate change, geopolitical developments, etc. I think India has done a very good job of maintaining macroeconomic stability with reasonable prospects for economic growth.
What about crude oil? It is nearing $85 a barrel.
Definitely, it is being watched. But again, I think it is still within the tolerance band for us.
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 capital expenditure this year, but it is still lower than the last 5-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 5 years or even longer-term buoyancy averages. So we are comfortable.
So, in terms of spending, we have elections coming. Do you see any pressure coming on the revenue side?
Not that I am aware of.
Do you think India would be able to deliver a strong G20 outcome based on the agenda that we put forward?
We have, in the circumstances that prevail in the world – after the breakout of the conflict in Europe — I think we have done a good job of pushing forward the agenda of developing countries, the global South while keeping in mind the sensitivities of the developed countries on some of these issues. The key priorities for the finance track in the G20 are in the form of the multilateral development banks and institutions to prepare them for addressing not only their existing priorities, which are development and economic role, but now the new challenges that have emerged –not just confined to climate and pandemic, but even food, energy water securities, etc. Part one of the report that the independent group has brought out has gotten a good reception. Part 2 will come out at the end of September. So, I think that we have made good progress. Second, where we have made good progress is in somehow figuring out how to deal with cryptocurrencies has been a major challenge for developing countries. By getting the IMF to prepare a paper and present it in March and then now getting the FSB and IMF to come up with the synthesis paper, which is coming out soon and includes both macroeconomic aspects and regulatory aspects. That is something that the Indian Presidency has pushed forward, and it has been recognised by other countries as well. The third area where we have made good progress is with respect to Pillar 1 and Pillar 2 of taxation, which has been pending for a long time. The more difficult issue has been the one of global debt because there are both multilateral considerations and bilateral considerations for some countries. Even then, some of the countries have applied for debt relief under a common framework, and they have moved forward during our Presidency. One country that was not part of the common framework because it was a middle-income country, Sri Lanka, there too India took the lead in providing financing assurance and getting IMF funding to happen. But, making progress on arriving at a common way of dealing with debt resolution across low and middle-income countries is something that requires further work. More importantly, it is not just enough to address those issues after they arise but to try to see how well it can prevent them from arising in the first place. The key item for India is the digital public infrastructure (DPI), and aligned to that is financial inclusion, which it facilitates. India has been appointed as the co-chair for the next 3 years for Global Financial Inclusion (GFI), which will also help us transfer expertise and learn from other countries’ experiences on India’s DPI and how and in what way it facilitates financial inclusion. The last item is, of course, the smart cities of tomorrow, which should take into consideration both health and climate considerations. A well-dispersed urban infrastructure will be good for handling health-related emergencies such as pandemics from spreading too quickly. But at the same time, energy security and energy efficiency require you to have concentration and scale effect. So how do you come up with criteria to help urban planners deal with both these elements? We have put forward some high-level principles that have been endorsed. So these are all tangible progress that we have made in the G20 finance track agenda.
We’ve seen this whole 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 towards revenue?
No, no, that’s not true. I mean, these are all election-related announcements, and by the time the parties are elected, and they start implementing these things, and then after they implement them, then you can look at their fiscal impact. So right now, it is too premature to make that conclusion. All that we have seen in the data in the current financial year is that the states have also ramped up their capital expenditure, and their deficit numbers are well within the parameters that they have committed to. So I think 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.
