The Reserve Bank of India’s monetary policy committee meets this week in the backdrop of the third consecutive 75 basis points interest rate hike by the Federal Reserve. Geo-political tensions continue; the US is staring at a recession, and inflation remains above the central bank’s target back home.
Despite the near-term challenges, Sachchidanand Shukla, chief economist at Mahindra & Mahindra, believes the next 15-20 years could be the best possible growth period for India.
Currently, the world is facing multiple problems, from inflation to geopolitical tensions. How do you see things from India's perspective?
India is probably the best place to be in right now from a very rational economic perspective. I have seen a couple of these episodes of global crises, and am positively surprised that we are far better positioned this time.
There are tailwinds that we see. And India’s positioning—the talk of China plus one, Covid-19 disruption-led digitisation push, dissonance in Europe and the US—all of these put us in a good place. Even if we grow at 6 per cent in real terms, it is very good in terms of what we see will pan over the next 12-18 months. If I add inflation and talk in nominal terms, a 12 per cent growth will double the GDP in around six years. Where else can you find that?
I agree, given the inequality, not all may experience the same underlying growth momentum. But if the tide does move up that fast, one will end up experiencing some of those gains. I have no doubt these are possibly the best 15-20 year period of economic growth for us.
On one hand, we are seeing slow demand in FMCG. On the other hand, if you look at premium automobiles, there is a strong booking, and a long waiting list. How should one read the economy right now?
This is what people call the K-shaped recovery in consumption. What we see in the economy everywhere is the weaker players, or those lower down in the pecking order have been hurt or weeded out. People have lost jobs, income levels are not the same. The smaller firms, MSMEs have been impacted severely. That is a hard fact for us to acknowledge. But those who survived are actually much stronger.
Talking of K-shaped recovery, any car that is priced more than Rs 10 lakh is selling seven times faster than any car priced less than Rs 10 lakh. High-end apartments are selling much faster. Demand for TVs that are 40 inch and above have grown three times in the last four-five years.
So, what is happening is those who survived, who had incomes, because you had ‘forced savings’, wealth effect i.e. you could make money in the market, it is manifesting in revenge consumption. These are the people who are now splurging.
Once the GDP growth starts moving up in a sustainable fashion, you will see incomes coming back, confidence coming back. But, it is going to be a long shot. You will need more than 12-18 months before there is some sort of semblance in terms of normalcy in broader consumption story.
Mahindra has a large presence across rural markets. How are things turning out in the rural and agrarian economy this year?
The forecast shows that we will have a fifth consecutive normal monsoon. But, the spread of rains has been a problem.
In the eastern and central belt, which has higher rice production, rainfall has been lower with up to 42 per cent in certain large states. So, while we are seeing pockets of pain in certain geographies, we are also seeing pockets where things are getting better. In certain states, when the season started for over two months, there was a huge deficit, but it is more than made up now.
So, how does one mitigate or undo some of the damage caused by erratic rainfall? A way could be via addressing non-agri incomes; governments can look at putting more money in people’s pockets through various schemes such as PM-KISAN or MNREGS or indulge in activities that boost incomes via construction and infra-activities.
What kind of impact is this going to have on inflation, which has been above RBI’s target (4 per cent, plus/minus 2 per cent) for eight straight months?
We are seeing global shocks, which is the energy and commodity bit, which is feeding into WPI (wholesale price index) more than CPI (consumer price index). We didn’t really build in adequately our forecasts for the disturbance in the distribution of rainfall. So things beyond tomato, onions and potatoes, vegetables and fruits that have a very small weight in the index have jumped significantly.
If I were to extrapolate some of the recent trends, whether it is food or energy or services, we should get these numbers below 6 per cent by the end of this fiscal.
We are in a relative world. So, look at what is happening in the US or Europe, inflation is four times higher than the policy target of the respective central banks. Despite things like oil that touched $130 a barrel and, the Russia-Ukraine war, it is remarkable that India’s inflation has stayed in the narrow corridor.
If I look at the decadal averages, last 20-30 years, inflation has been around 6.7 per cent. In India, we have always had inflation being high. We have other peculiarities i.e. a higher weightage to food, which tends to be very volatile. Even in the current CPI, the food weight is around 45 per cent, which is very high compared to what others have.
How will monetary policy pan out in this backdrop?
We don’t have a major problem in terms of inflation shooting above target range. If the RBI believes and most people believe that by end of last quarter, inflation will fall back within the range, you don’t need aggressive rate hikes.
But if the US were to continue to jack up rates aggressively i.e. they have raised policy rates to 3.25 per cent from 0.25 per cent in just about four months; this is already unprecedented. So, the RBI may have to, not really match it, but at least directionally keep raising rates. Otherwise, our interest rate differential becomes adverse and then rupee gets hurt more, which feeds into inflation and cause other problems.
We do think, like most people, the RBI will stop somewhere around 6 per cent (current repo rate at 5.4 per cent) in the current cycle.
Expectations of the US slipping into a recession will also have an impact on the rest of the world, including India, right?
It should. We are not completely isolated. But, what we have seen in the last three episodes at least, is that a ‘mild’ US recession has turned out to be good for India. We import lot of commodities like oils and metals. If there is a global or a US recession, but it is mild, the prices of these commodities will come off. India’s current account deficit reduces and the pressure on rupee abates.
If the US is going to grow at -1 or zero and we are growing at 6 per cent, although not great by Indian standards, it is still outstanding. So, this growth differential will eventually attract capital. So, the current account bill goes down and the capital account will start getting flows.
However, if it is a ‘deep’ recession, we all go down.
There is a talk of China plus one policy from a global manufacturing perspective. The Centre has announced production-linked incentives for several sectors. But, even as our manufacturing is increasing, our unemployment rate is high. So where does the problem lie?
This has been a feature of our economy. Typically, post the industrial revolution, people moved bulk of the population from less productive agriculture to industry and then to services. We missed the second step and jumped straight to services. We are now trying to pivot the economy to industrial activity. Some believe it is too late and we have missed the bus. But others do believe there is an effort that is required, which may work out in a few years. However, we will only know in the hindsight.
Since the global financial crisis, it has been a volatile period. We have had a pandemic. We have a huge population on the rural side. We have to take them into productive areas. We haven’t been able to do it at a rate that is desirable. Therefore, it is going to be a challenge. We have to try out things, which may or may not work. We will have to find avenues to create jobs.
There are a lot of tailwinds like China plus one, there is this entire effort being made on supply chains. Hopefully, some of these things will fall in place and we have the right ingredients. The only thing is for India Inc. to embark on big capex drive, the world is too volatile to inspire huge confidence. Why will a company put up a big capacity when you don’t know which way the world is going to go or how global demand will pan out? People would want some clarity on demand, geo-politics and policies. Once we have some semblance of normalcy, we should see some traction.
