- 7 weeks ago
A panel of expert economists examines India's latest economic momentum and gross domestic product growth print. Madan Sabnavis, Chief Economist at Bank of Baroda, notes that the 7.8% growth figure 'was much beyond our own expectations' while highlighting key risks from inflation, kharif crop performance, and private consumption. Madhvi Arora, Chief Economist at Emkay Global, discusses sequential gains, capital expenditure trends in the micro, small, and medium enterprises segment, and central government interventions during the West Asia crisis. Sajid Z. Chinoy, Managing Director and Chief India Economist at JP Morgan, points to cyclical recovery drivers, energy import diversification, and a boost in export competitiveness. Additionally, Subhash Garg, former Finance and Economic Affairs secretary, raises questions regarding the baseline revisions in current prices nominal gross domestic product and analyses the potential necessity of an interest rate hike by the Reserve Bank of India to balance external flows and manage currency differentials.
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NewsTranscript
00:00Well, clearly, while the opposition also has whatever it has to say,
00:05there is merit in discussing the way in which India seems to have broken
00:12and gone beyond expectations when it comes to maintaining the economic momentum.
00:19And we are now joined by two expert economists on this subject,
00:22Madan Sabnaviz, the chief economist at the Bank of Baroda,
00:25and Madhavi Arora, chief economist at MK Global.
00:29Madan, I want to come to you because some amount of time has passed
00:34between the headline numbers being released and you've spent time decoding
00:38what these numbers really are all about.
00:41There are, of course, always going to be some naysayers,
00:45but like the prime minister said, those who had a negative view have been doomed.
00:50How do you read these numbers?
00:53And more importantly, what does it tell us about the rest of the year?
00:57Madan.
00:58Yeah, actually, I think this particular number of 7.8% was much beyond our own expectations,
01:04but we are looking at something closer to 77.2%.
01:07So, therefore, this is a very good surprise to have.
01:10Now, I think that one quarter has gone past,
01:12and I think all the contemporary indicators which we had during the course of this particular quarter
01:18were also indicating that things were doing very well.
01:20And one indicator which actually I look at very closely are the corporate results.
01:24So, I think the Q1 results of corporates, even if I exclude the BFSI and IT sector,
01:29turned out to be very good.
01:30I think it's the very first time we saw a very good top line as well as bottom line growth.
01:34So, we knew that the performance was going to be very wide.
01:37But I think, Siddharth, the question is that what happens in the next three quarters,
01:41because one quarter is one part of the year, and we still have three quarters to go.
01:45I think there are two particular threats which I think are there very much for us.
01:50One is in terms of the monsoon.
01:52We know that it's an Illinois year.
01:53We also know very well that virtually everything that had to be sown is already being sown.
01:58And I think we have a deficit in terms of cereals, in terms of oilseeds, cotton, and sugarcane.
02:06So, agricultural production is one particular risk factor which I see.
02:10Of course, if we do get higher production in these numbers, then there's nothing like it.
02:13And the second part is, of course, in terms of consumption.
02:17Because I think if you look at the first quarter, what I have seen is that it has basically been
02:21driven by capital formation.
02:23If you look at the growth rates in nominal terms, I always look at nominal rather than real,
02:27because we're able to relate it to what happens to bank credit.
02:30We have seen there has been a phenomenal growth in capital formation, which is very heartening,
02:35because all this time there's this thing of saying that is the private sector investing or not.
02:39Now, it looks like that both the government as well as the private sector have been investing.
02:42So, therefore, we're seeing a 20% growth.
02:45But if I look at consumption, it's close to 10%, 9.9%, I think, in nominal terms.
02:49So, I think that is something which needs to be maintained in the coming quarters.
02:54Now, will it be maintained or not?
02:56I'm not quite sure, because if we do believe, at least I do believe, that inflation is something which is
03:01going to go up,
03:02we're going to go towards the 6% mark.
03:04We've already seen prices of essentials going up.
03:07Milk prices have been increased.
03:08Onion prices have gone up.
03:10Sugar prices have gone up.
03:11Now, this is something which should come in the way of consumption plans.
03:14So, I think these are the two threats we have.
03:17One is what happens to Kharif Krop.
03:19The second thing is on account of consumption.
03:21Both of them linked on account of inflation, which will be driving it.
03:24So, while we have also upgraded our GDP forecast, we're not being too optimistic or too bombastic about it.
03:32We are sticking to something closer to 7%.
03:34We're not yet going beyond that number as of now.
03:37Okay, you're not going beyond 7% as of now.
03:41Madhavi, apart from your comments on the data, what is your forecast?
03:47Any revised forecast?
03:48Are you agreeing with what Madhan has to say?
03:51Or are you the one who would tend towards a higher range, perhaps closer to 8%?
03:58I concur with Madhan.
03:59We are also looking close to 7% at this point in time.
04:02Exactly 7% actually on the GDP.
04:05But value added, we're looking at around 7.2, 7.3% for the year.
04:10But, you know, one has to note the fact that for the year as a whole, the best is already
04:16passed in terms of the, you know, sequential gain.
04:19So, going forward, while the rest of the year would probably hug close to 6.8% to 7%, the
04:27best is already played out in the first quarter.
04:30And interestingly, this also has happened despite the fact that we have seen massive past revisions.
04:35Had there been no revision in the last year's data, probably this quarter would have been as high as 8
04:40% if I take the numbers as a whole.
04:43But that said, I think one has to reckon with the fact that, you know, the data has obviously exceeded
04:49most expectations.
04:50We were looking at 7.7% growth for this quarter, expectation-wise.
04:56Okay.
04:57But, yeah, so it was not a big surprise for us as such.
05:01But we also reckon the fact that when we were in the peak of the Middle East crisis, we were
05:07expecting growth to be somewhere close to 6.5%.
05:10The first quarter earnings data did surprise us on the positive side because, you know, all the company commentaries that
05:17we heard were very positive on consumption story or on the resilience of consumption story.
05:23Plus, we're also seeing, you know, a cyclical upturn in the CapEx cycle, both led by public and private sector.
05:28So, first six months, if you look at the CapEx data for the private sector, which is a proxy that
05:35we track, there's been a consistent uptake.
05:37In fact, for this June quarter, the four-quarter moving average CapEx for the private sector is now tracking close
05:43to 14-15%.
05:45Madhavi, just to interrupt you there, for the benefit of our audience, simplify it.
05:51What are you telling us?
05:53Are you saying that the private sector, which for years was seen as lagging in investing money for growth in
06:01India and instead was sweating its current plants and assets more, is now finally putting in money for future growth?
06:09Is that what you are saying?
06:11Yes. The fixed capital formation has been steady. And, you know, in the last five years or so, post-COVID,
06:18the general government led by Centre was a large player in this so-called CapEx story.
06:22And we were saying that the private sector capital formation is absent.
06:27We are seeing a cyclical upturn in that. And interestingly, it's possibly been written by the MSME segment, not the
06:34large cap guys.
06:35You know, we're not hearing big stories or big names like LNTs, you know, putting up new plants and stuff
06:39like that.
06:40But if you look at the credit optic to MSME, that has gone up. If you look at the private
06:44sector, proxies of CapEx, they're also looking pretty healthy for the last six, nine months.
06:49They're finally tracking the private consumption, which also has gotten a kick from the GST cut.
06:55And thus, to a large extent, this first quarter, which was bearing the brunt of the West Asia crisis, the
07:01pain has not been borne by the private economic reasons.
07:04The government has taken the large brunt of it on its own books.
07:07Absolutely. The government handled the pain points of the West Asia crisis, and we know how that firefighting happened.
07:15But Madhan, coming back to you very quickly, we also saw data that FBI inflows have also gone up, and
07:25we've seen a kind of reversal of a trend significantly with the latest data that has come out.
07:32Can I therefore ask you, are we now seeing a proper trend reversal when it comes to private capital expenditure
07:40and inflows of foreign portfolio money into our markets?
07:45Look, I have a slightly different take when you're talking of private investment.
07:50I did mention that private investment is taken off, but I don't think it's broad-based.
07:54So that is something which is always missing.
07:56Because if you look at the overall investment intentions and which are the sectors which have been actually getting into
08:01investment, you'll realize a lot of that is going into IT, data centers.
08:05I think data centers, AI is something where there's lots of investment being made.
08:08If we're looking at power, both conventional as well as renewable, there's a lot of investment going on there.
08:13Metals, we have investment taking place.
08:15We have something taking place in oil.
08:17But beyond that, if I go into the consumer goods segment, we still have not seen that kind of fraction,
08:22which really means that investment is taking place.
08:24It's not just that the government is investing, the private sector is investing, but there is surplus capacity.
08:30So when I spoke of the threat of consumption, the thing is that consumption needs to keep increasing.
08:35Only then does the capacity utilization improve.
08:37And it's at that particular point of time that companies in the consumer goods space will start investing.
08:42So I think we'll have to wait to see.
08:44Samyakanti Ghosh, just a little while ago on this show, said that rural consumption is, you know, doing better than
08:53urban.
08:55Why is this? Is this on account of all the welfare schemes and their impact, coupled with maybe other reasons
09:03related to the agriculture economy?
09:06See, from what I've figured out, my information is based more on what the corporates say during their quarterly result
09:14handouts.
09:15So out there, there's generally been a tendency that in the first quarter, we have seen that there's a revival
09:20of demand, both in urban as well as rural areas.
09:22So I should assume that if there's a view saying that rural has done better, it could be maybe marginally
09:28better because there was a good Robbie crop last year.
09:31So therefore, there is a certain amount of spending taking place.
09:34Now, the whole question is that will this really lead to companies investing more?
09:38So that is something because just remember, I think this year we're going to have a rate hike.
09:43Interest rates are going to start increasing and companies are going to be a bit careful when it comes to
09:47investing.
09:48I'll invest only in case there is demand.
09:51How much of a rate hike, Madan?
09:53We're looking at one rate hike at least, probably in the month of December.
09:57Based on the fact that if you look at the inflation forecast of the RBI, they're talking of 5.9
10:02% in Q3.
10:03So I think at that point of time, you have a better information about how the Kharif crop has behaved,
10:07how prices are behaving.
10:08So that's when we'll have the first rate hike.
10:10Of course, if I look at the OIS markets, it looks like there could be even two hikes as we
10:13speak today.
10:14Now, the second part, could you ask?
10:16Okay, two hikes.
10:17Madan, hang in there because I also want to welcome to the show another noted economist, one of the most
10:24popular voices on our macro economy,
10:27Sajid Z. Chinoy, Managing Director and Chief India Economist at JPMorgan.
10:33And Sajid, welcome to the show, Madan and Madhavi.
10:36And before that, Swami Kanti Ghosh have been having a go at trying to decipher this massive set of numbers
10:44where the Prime Minister said what he said.
10:47I want to quickly bring you in and get you to give us your first thoughts.
10:52Were you surprised?
10:53And as you have read through the data, is there anything that sticks out that you would want to relate
11:01to us?
11:02Thank you, Siddharth.
11:03Always great to be here.
11:04So we were not surprised at all, right?
11:07Our sense of normal, our forecast for real GDP growth, and we wrote about this before the print came out,
11:13was 8%.
11:14And we thought nominal growth would be somewhere between 10% and 11%.
11:18And both those numbers were very close.
11:20Real GDP was 7.8%.
11:22GVA was 8.2%.
11:24And nominal was 10.3%.
11:25Why were we not surprised?
11:27Because I think there are three different drivers to what we saw yesterday.
11:31First is we've been seeing a cyclical pickup in the economy since the last quarter calendar year of 2025.
11:37We've spoken, Siddharth, in the past about the huge cyclical stimulus that was injected to the economy, direct tax cuts
11:46last February, GSD cuts in September, 150 basis points of monetary easing, regulatory easing, a weaker exchange rate.
11:54So that had already begun to show up in the October to December quarter and the Jan to March quarter.
12:00The question really was, could India insulate that recovery from events in the Middle East?
12:06And I think this is where the government deserves enormous credit, because what you saw was the initial concern that
12:14the economy would have shortages of energy in the month of March and April that would derail the economic recovery
12:20were not brought to bear because the government scrambled and scurried to diversify energy imports as much as we could.
12:27We got more crude from Russia.
12:29We got more energy from Oman.
12:30And ironically, we ended the quarter importing 20% more energy in volumes than we do in a normal April
12:38to June quarter.
12:39So that, for me, was the key point here, that the cyclical recovery was protected by the way we managed
12:45the crisis.
12:45And the third final point I'll make, which is the one which I think is least appreciated, is the role
12:51that exports have played in the last three or four months.
12:53We saw this in the high frequency data, and what you saw is yesterday, the biggest delta was exports growing
13:02from 4% the previous quarter to 12% last quarter.
13:06The contribution of net exports to GDP growth was three percentage points.
13:11Now, this last very final point I'll make is this is a consequence of the fact, in my mind, that
13:17the exchange rate has been allowed to depreciate almost 15% over the last year.
13:23That boosts export competitiveness.
13:25It makes imports more expensive.
13:27Tariffs came down earlier this year, and the global economy is resilient.
13:31And so, in a way, this was a perfect storm.
13:33You've got a weaker exchange rate, a strong global economy, a cyclical recovery fully in motion, and a government that
13:39worked to protect that recovery from being damaged by events in the Middle East.
13:45Good points there, Sajid.
13:47Madhavi, I want to come back to you on the point of interest rate hikes.
13:52Madhan made a mention of that.
13:53What's your own sense is an interest rate hike around the corner, and what will that do, perhaps, to dampen
14:02consumer expectations, and especially on account of the fact that we are very soon going to head into the festival
14:09season?
14:11There's been a change, you know, in the global winds in general.
14:15You are seeing the global financial conditions tightening across the world.
14:18There is, you know, a sense that, you know, possibly the cyclical recovery in the global order is going to
14:26sustain, which also will have a spillover effect on inflation to that extent.
14:30More importantly, I think what you see in post-COVID is that there's been, you know, a much higher pickup
14:37in the growth story than, you know, one would have expected post-COVID.
14:41There's been a fiscal activity which has been continuously feeding into the growth story, and we are looking at the
14:47real rates across the world going up.
14:48India is no different in that front.
14:51To that extent, I believe that in the near term, what you're looking at is how the financial conditions play
14:56out around the world.
14:57India is also seeing a brunt of that.
14:59We are seeing the 10-year yield now crossing 6.95.
15:02Of course, there's also been a lot of discussion around, you know, the mismatch of RBI's communications from the policy
15:09versus what the minutes showed out.
15:11But that said, as Madan was also mentioning, you know, there's a possible risk that we would see the Reserve
15:17Bank move the needle probably in December.
15:19I'm not looking at it to happen in the month of October.
15:23Obviously, what's happening globally will also have to be reckoned with.
15:26There's a lot of geopolitical fluidity that is playing out.
15:29Plus, you know, how, again, the global financial conditions play out, how the Fed reaction function also evolves, will feed
15:36into the Reserve Bank's reaction function.
15:38And to that extent, I think in the near term, they also probably are, you know, managing the market expectations
15:47by letting the yields be better.
15:49So, I think one has to recommend that.
15:51We'll have to wait.
15:51Absolutely.
15:52I agree with you.
15:53We'll have to wait for what the monetary policy response is.
15:57We are also joined by Subhash Garg, former Finance and Economic Affairs Secretary.
16:04We will be going to Mr. Garg in just a bit.
16:07Sajid, I want to come back to you.
16:09I have two quick questions for you.
16:12One, about private investment.
16:17Other speakers on this show have spoken about that.
16:20I want your views.
16:21And do you think a stronger private investment cycle is now something that we can sort of write in as
16:30a given?
16:32I don't think we can write it as a given.
16:34I think the last few months have been very encouraging.
16:37But we have to appreciate that this is a cyclical recovery, which is what we were aiming to get last
16:43year, right?
16:44And the key for the recovery sustaining for more than a few quarters, because what's going to happen is eventually
16:51the impact of the tax cuts will wane.
16:54You know, interest rates, as you pointed out, the direction could reverse.
16:57So, some of these cyclical impulses will wane.
17:01For the recovery to be sustainable for several quarters, it's really important that we begin to crowd in private investment,
17:09because as we've seen, there are limits to what public investment can do.
17:12So, for me, the key enabling mechanism for this to continue for the next four to six quarters is for
17:19gross fixed capital formation to pick up.
17:21Now, as we've discussed in the past, the issue there has been demand visibility.
17:25And the hope is that if consumption growth can continue for a few more quarters, if stronger exports growth can
17:33continue for a few more quarters, that will begin to eventually crowd in private investment.
17:39But we'll have to wait and see about the data, because you've got a global environment that's still very uncertain.
17:44We still have an alinear shock ahead of us.
17:47You know, we've got higher U.S. interest rates.
17:50Crude prices are still above 90.
17:52And China's got lots of excess capacity.
17:54So, many emerging markets are facing all these headwinds.
17:57The good news for India is domestic demand has begun to fire now in the form of consumption for three
18:03quarters, and exports are picking up.
18:05But we'll need to see this continue for a few quarters, in my mind, to get a broad-based private
18:11capex cycle being crowded in, because utilization rates are still at 75%, 76%.
18:16I think we'll need to see those go up towards 80% to get a broad and convincing and sustainable
18:21cycle.
18:22Okay.
18:23That's a very important comment there.
18:26Let me bring in Subhash Gharg, former Finance and Economic Affairs Secretary.
18:30Mr. Gharg, welcome to the show.
18:32We have an esteemed panel of economists, and we were hearing Sajid speak about the private investment cycle.
18:38I just want a quick first response from you, especially on account of your ability to understand both sides of
18:48the coin.
18:48There are some people, including the political opposition, which is questioning whether this growth is real.
18:55What would you say?
18:57I think this is a serious question, which we should really examine.
19:02The growth, 7.8% in this quarter, on the face of it, looks very good.
19:10But I think you must have done these numbers now.
19:14We didn't have the real GDP data in the new series for the last year, first quarter.
19:23Last year, first quarter, the GDP numbers were given on the old series.
19:28So the number which has now been used as a base for 25, 26, Q1 is the number which the
19:37MOSP has come out for the first time.
19:40And therefore, comparing it with that base should be taken with a little bit of a pinch of salt.
19:47The better sort of analysis is done in terms of current, the GDP growth in current prices.
20:00And there, I don't know whether it has caught your attention or not.
20:05The government has drastically revised the GDP at current prices for 25, 26, Q1.
20:14It's such a massive, drastic reduction in the base year's Q1 GDP current prices that the growth is now 10
20:25.3%.
20:26If you had taken the numbers, and the current prices don't change, if you had taken the numbers which were
20:34put out last year as the GDP in current prices,
20:38the growth is less than 2.5% in current prices, nominal GDP.
20:44So these two factors give me a kind of little bit of a doubt about whether 7.8% is
20:53genuine or not.
20:55Since you are questioning this number, Mr. Garg, I want to ask you, by your own calculations, if any, what
21:04do you think is therefore the real number?
21:06See, the difficulty is that the GDP real prices is a derivative number.
21:16You calculate the nominal first, and then you take out the deflator or the inflation element out of it to
21:23work out the real GDP.
21:25Real GDP is not calculated as such in the system.
21:29And therefore, if you go by the current prices numbers, that is where it comes to.
21:38So if that number, now, why did the government decide to revise down the last year's current price so much?
21:48If you take that, as I said, it's 2.5%, I would say that there might be some justification revising
21:57down the last year's current prices GDP, but it can't be that much.
22:01So depending upon what you take it, if you take 2.5% as the growth compared to the last
22:08year's GDP current prices and take 2% or 3% as the inflation, then the real GDP growth is
22:17non-existent.
22:18But if you take the number as 5% or 6%, then the GDP growth is much smaller.
22:25Okay, Madan, I wonder whether you want to kind of take this point forward and your own assessment in light
22:33of what Subhash Garg is saying?
22:36No, actually, I haven't quite looked at this particular factor.
22:39It's quite a revelation what Mr. Garg has said in terms of what was done in terms of the revised
22:45numbers of Q1 of last year.
22:47So I don't think I'll be able to make an intelligent comment out there.
22:50But yes, it is definitely a concern based on what Mr. Garg has said, that if we're really saying that
22:56the number was revised, and it's a fact that all GDP is calculated in nominal terms, and then we use
23:01the deflators.
23:02So there would be a case of saying that the number would not be 78%, but probably be something lower.
23:08So I would take that particular point.
23:10But definitely I would like to examine it further before I make any comment.
23:15Mr. Garg, I come back to you.
23:19Let's leave the number debate aside for a moment and ask you about the management of the economy during the
23:26first quarter, particularly in handling the West Asia crisis, the oil supply shock, and its second-round impact.
23:35How would you assess that?
23:37Because it is important.
23:39The West Asia crisis is not fully over as yet.
23:41How would you assess that handling, which seems to have demonstrated significant resilience as far as the broader economy is
23:50concerned?
23:50I think that was outstanding in the sense that the government decided that come what may, whatever price you buy,
23:59you buy, but don't allow the shortages to happen.
24:02And the government succeeded in that.
24:05They bought gas and the oil from wherever it was available, whatever price.
24:11And we did not see any kind of panic or any kind of, except for initial five, seven days.
24:17And from that point of view, if you are looking for, from the management of the economy or supply in
24:23that difficult period, to my mind, that was outstanding.
24:27But what is the impact of that on the economic growth of that is a different question.
24:36So if you buy so much of things at high prices, et cetera, and you don't allow prices to get
24:43to the consumers, ultimately it results into the government net taxes being sort of very artificially adversely affected.
24:56Mr. Garg, for the sake of time, I'm interrupting you to ask you a pointed question.
25:01As a former policymaker, would you say that given all the circumstances and this particular important point, that the monetary
25:11response should be a rate hike?
25:12Or should it be standstill for an extended period of time to fully nurture the growth impulse?
25:20See, I would rather believe that rate hike is justified because the differential between rupee interest rate and the dollar
25:30interest rate has become so small.
25:33But the incentives for the foreign direct investment and the foreign debt flows to come in into India is really
25:41gone.
25:42And this situation is the result of, resulting into how desperate the Reserve Bank has to buy the dollars through
25:52deposits.
25:52Very expensive way.
25:54So I think it would be for the rate hike.
26:29Next few months, we'll have to wait for that to pan out.
26:31I'm going to thank all my guests for their time here with us today and you, the viewer.
26:35With that, it's a wrap.