Gaurie Dwivedi:
The Economic Survey survey projects a very positive outlook for the Indian economy, especially when viewed in the context of the headwinds which the global economy is facing. In one of your interviews you had stated that the economic survey is actually an annual economic story, so I begin by asking you: In your assessment, what is the India economic story for the next 12 months, 24 months or even beyond?
Anantha Nageswaran:
The next 12 months story is one of continued economic growth. The momentum set in 2021-22, will continue this financial year. Soon after the Union Budget 2022-23 was presented last year, within a few weeks the conflict in Ukraine broke out and then over the next 4 to 5 months we witnessed commodity prices and oil prices shooting through the roof. But we navigated the impact of the war through government’s proactive supply measures, central bank hiking interest rates and by ensuring adequate supply of food and fuel inside the country. The estimate today is that we will grow at about 7% in real terms for the current financial year. That’s a very creditable achievement. The only country within G-20 that is going to grow faster than India is Saudi Arabia, which is largely the result of the oil boom. Over the next year, even though the international agencies project a slightly lower growth for India, it will still probably be the fastest growing economy.
India’s growth story, I think is about a steady recovery. We have got through the impact of the pandemic and the economy is steadily marching on. We did have a difficult second decade because the financial system, the banking system, overextended itself in the first decade of the millennium. We therefore had to do an adjustment and what I call digestion of the excess credit which the government and the corporate sector had created. The corporate sector had to reduce their balance sheet, sell assets, pay off debt, etc. All that is now behind us. Therefore, I expect the financial cycle and the capital investment cycle to be in our favour. What were headwinds in the last decade is going to turn into tailwinds in this decade. The second reason for my hope and optimism about the Indian economy is the digital transformation of the economy. This took place not just because of the pandemic, but because fortuitously, the building blocks had been put in place well before the pandemic struck. This is also going to propel growth in the country, drawing segments of the population which we had not hitherto included in the formal economy. So, it is the formalisation, financial inclusion facilitated by digitisation and the resumption of the credit and capital investment cycle, that is what will drive India’s growth not only in the next 12 months but 24 months and beyond as well.
Gaurie Dwivedi:
On growth projections, you have spoken off variations of course that typically happen between the finance ministry projections, the economic survey and projections by international agencies. You have also stated that these numbers give us a false sense of precision. But how far off could we be from these numbers and are there any reasons to worry for us to be off this track?
Anantha Nageswaran:
How far could we be from the numbers that we are projecting for 2023-24? That itself is a question which is difficult to forecast. So, forecasting how far off your forecast will be from reality is also as challenging as making the initial forecast. So, I would not venture into that, but I do give some clues as to where I see the balance of risks lies. When I picked the number of 6.5 % as real GDP growth for 2023-24, deliberately, I gave the range as 6 to 6.8. I could have given the range as 6 to 7 on my baseline of 6.5, but I picked the range of 6 to 6.8, to indicate that the downside risk is higher than the number being exceeded. So, while 6.5 is my base case scenario, it could go all the way down to 6 on the lower side, but on the upper side it could only go up to 6.8. So, I’m adding only 0.3% to the upper end, but adding 0.5% on the lower end of the range, which kind of tells you that I still see challenges and those challenges stem primarily from the global environment. We have no idea of what will happen to the conflict in Ukraine and how that may impact on the price and supply of crude oil. Just last week we saw Russia deciding to cut the oil supply by 500,000 barrels per day! Also, we do not know the speed with which or the smoothness with which Chinese economy will reopen and what kind of demand it will create for commodities. Should the US and European economies avoid a complete economic recession, then it will also add to the demand for fuel, etcetera. Then we need to see how that will impact oil supply and oil prices. So much of the risk that India faces stems from external factors, and those uncertainties are still quite big. So, there are large number of unknown unknowns and that is why I feel while the baseline number is 6.5, I do see downside risk dominating the upside.
Gaurie Dwivedi:
Global factors do impact on the level of risks to the economy. Now, if China opens up faster, it grows faster. There will be, accordingly, major spike in commodity prices and so on and so forth. On the other hand, we are looking at probably the global economy reaching its lowest level in terms of growth rates, especially when we view the European market. This will have a direct bearing on our exports and our economy. How do you see that panning out?
Anantha Nageswaran:
It’s a fair question. Obviously, whatever happens in the global economy, whether it is performing better than expected 3-4 months ago or performing worse than expected 3-4 months ago, both will have their own implications for India and those implications will be a mix of good and bad. Ultimately, we have to come to a judgment on balance, whether the good effects dominate the negative effects or vice versa. So, with that framework in mind, I can say that a global economic slowdown will, on balance, be more beneficial to India than a global economy that does better than what we expected a few months ago. And the reasons are yes, you are absolutely right, export growth will be impacted. But remember, India’s services sector growth in the developed world is mostly recession proof. Recently, a major IT company executive told me, based on empirical record over the last couple of decades that when the global advanced economies slow down, the demand for IT services from India comes from their need to tighten back-end operations and control costs. When their economies are doing well the need for India’s IT enabled services come from their front end wanting to expand their markets and so on. So, whichever way their economies are going, one or the other side of the company’s operations seem to be having the need to use Indian IT enabled services. That’s a good thing. So, services are reasonably recession proof. And we can verify that with the data as well. Exports of course will be hurt, but set against this, what are the benefits? Global oil demand will come down, imports will be lower, oil price will come down, the central banks in the developed world will stop raising interest rates and may even drop them. So the pressure on the US dollar to appreciate will be less intense, which will provide relief to many emerging economies and currencies, including India. Therefore, investors from developed countries whose economies are slowing will be looking for investment opportunities in countries like India which have a current account deficit. India’s need for external financing thus becomes easier to obtain. So, you have these multiple benefits and against that there is a little bit of impact on goods exports. So, I would consider the positives outweighing the negatives of a global slowdown. That is why I will be somewhat relieved to see a world economy doing somewhat less better or somewhat worse than expected.
However, I must say that since the beginning of the year, the feeling is that the European economies have dodged the recession because the winter has been much warmer than expected and gas prices haven’t gone up to that extent. Also, the US economy, even with the most recent employment data, seems to be pretty strong. So, at the moment I would say the indications are that the global economy would be performing better than what we thought, let’s say in October 2022 when the IMF brought out its World Economic Outlook, but in January the World Economic Update that they provided was a tad better in terms of sentiments and China’s reopening and the speed with which the reopening happened was also completely unanticipated. So, we have to wait and see.
Gaurie Dwivedi:
So, China is like the X Factor in the equation right now, you know because how far it will grow, how fast it will grow, and also how much will there be, will impact globalisation sentiment. There may or may not be, alternate supply chains, and all of which, of course, will have a direct bearing on the India story and the manufacturing side of it. How do you foresee India’s presence in these supply chains that are getting realigned? India’s manufacturing has been stuck at about 15 to 16 percent for decades. As the chief economic adviser how do you see these global scenarios pushing that upwards?
Anantha Nageswaran:
I think this global scenario does provide us an opportunity. I would say India’s industrialisation story is not a story of missed opportunities, but it is a story that is still waiting to unfold because I think we never really had the kind of infrastructure that facilitates this manufacturing growth. Now we have that. There is a certain critical mass, whether it is roads, railways, ports, telecom network, digitisation, I think we do have the building blocks that can facilitate a rapid growth in manufacturing. And also, the geopolitical environment is making many companies, even though they may not spell it out very clearly for various reasons, look for opportunities that India provides, both in scale and capacity. Foreign companies are definitely also going to countries like Vietnam, Bangladesh, Mexico etc. but all those countries, being relatively smaller compared to India, will have at some point, limitations in capacity creation, etc. India provides not just a large domestic market for these companies, but also the ability to set up manufacturing at scale. What India is therefore aiming to do is to create local manufacturing capacity at scale to be able to cater to domestic and overseas markets. And that, I think, is a story that can happen and will happen. The entire Production Linked Incentive (PLI) is geared towards making that happen and it is too premature to talk about its success or failure because many of those sectors under the PLI were opened up only in 2021. Therefore, you receive applications in 2022, take time to evaluate, and then you grant them the license approvals and then they go about setting up the capacity and then they start producing and then they start exporting. So, this is not something that’s going to happen at the speed with which one can write out a tweet. So, I think the PLI scheme, the national logistics policy and the PM Gatishakti program are all elements of India’s manufacturing becoming a force to reckon with in the economy, and I think it’s an important policy goal. I am confident that global conditions are also getting aligned with India’s goal for its own manufacturing.
Gaurie Dwivedi:
And how soon do you see this panning out? Today, some of the building blocks are in place, so infrastructure costs are now going down for companies and power supply too is more stable. What kind of an outlook do you foresee over the next 3 to 5 years.
Anantha Nageswaran:
I think in the next 3 to 5 years we will see the results of all these policy initiatives. Unfortunately, even as these policy initiatives were being rolled out, we faced shocks caused by the pandemic, followed by the commodity price shock and then the synchronised monetary policy tightening. So naturally, what happens is investors tend to become cautious. They want to re-evaluate in the light of higher cost of capital for them and then in the light of higher commodity prices. They have to factor in the risk element. Say, for example, a ship is blocked in the Suez Canal for two weeks! So, there are many risk elements that have to be factored in. So many of these exogenous factors are external developments of the last 12 to 24 or even longer months, which naturally makes investors cautious and a little bit slower in responding. That is why we sometimes feel a little bit frustrated and concerned that the results are not showing, but once these one off shocks slowly go out of the system, we will begin to see the results of the various policy initiatives meant to push India’s manufacturing share higher.
Gaurie Dwivedi:
As a policymaker, do you now think that the policy framework is nimble footed, and responding as fast as it can? It’s not cast in stone; it wants to attract investments and is responding to markets.
Anantha Nageswaran:
I think I would say yes to all of those questions, because the intent is very clear whether it is in public pronouncements or actual policy decisions. We have taken decisions to supplement and complement the PLI with the logistics policy ‘Gatishakti’, which enables government projects to be timely implemented without cost overruns and then a tax policy that allows lower tax rate for new manufacturing established within the country, which has now been extended to cooperatives as well. We had the reduction in the corporate tax rate in September 2019, that allowed the corporates to rebuild their financial health. These are all part of the policy package and they’re acting in sync. So, there is quite a bit of clarity and sure footedness in terms of doing our best to achieve these aspirational goals and the creation of public infrastructure by the government when the private sector was still repairing its balance sheet and sort of getting back to good health. All of these things are quite clearly focused on the idea and aspiration of bringing India’s manufacturing onto the global stage and plugging India into the global supply chain networks.
Gaurie Dwivedi:
When we talk about aspiration, we talk about a 10 trillion-dollar economy. We understand that this cannot be achieved overnight, but those are aspirations that most of India has. Do you share them and do you see us realising the same? Is there a path that you see for that?
Anantha Nageswaran:
At a personal level, I do not subscribe to this idea of these number-based GDP targets. They are placeholders, but media and several commentators are very focused on these numbers and they try to pin the government to the same. But we know that to achieve a particular level of GDP, it is not just the government policies or efforts or project implementation. It is a whole lot of factors well beyond our control, happening outside our borders that also matter. So, in fact, it is not just a philosophical statement in line with what the Lord said in Bhagavad Gita- “What is in your control is your efforts.” So, whatever we must do with the government sector, with the private sector, with households, we will do. But whether they result in a particular GDP outcome this year or next year, depends also on other factors which are beyond our control. But we must keep doing what we have to do. So that is my personal philosophy. But having said that, I think right now in March 2023, we are going to have a GDP level of about USD 3.5 trillion. And just to give you a sense of where we came from – In 1993, our GDP was only around 300 billion dollars and we’re talking about 3 .5 trillion dollars now—a tenfold increase in 30 years, in dollar terms. This indicates a growth rate of about 9.1- 9.2% per annum in dollar terms, despite the depreciation of the rupee from Rs 30 or 32 to the dollar in 1993 to about Rs 83 to the dollar as at present. So, we have achieved a 9 % annual growth rate in dollar terms. I, in fact, said in my post economic survey press conference interviews or even before that from a 3.5 trillion dollar economy in March 2023, to get to 7 trillion by 2030 March, a 7-year period, is possible because the rule of 72 tells you we need to grow at 10% per annum in dollar terms to get to that number. We have achieved 9% growth in the last 30 years on average and over the next seven years, we could actually see the dollar depreciating against the rupee, because interest rates in the developed world may not go up so much and their inflation rates are not going to be as low as before. So, in real terms their interest rates could be quite low or even negative. And that doesn’t make the case for a stronger dollar. So, in fact, if the Indian rupee rather than depreciating, if it were to appreciate, it will happen even faster. So, to talk about 7 trillion dollars by the end of the decade isn’t particularly outlandish.
Gaurie Dwivedi
Yes. That’s very positive and very good to hear. We have today, the largest population of young people. They need jobs, they need skills and we have to see that the demographic dividend materialises. This can only happen when we have growth engines. As we sort of wrap this conversation, Dr. Nageswaran, what are your concluding thoughts in terms of some of the important initiatives that the government is taking, whether it is in terms of free trade agreements that it is looking to ink, or coming up with newer ideas to look at fresh growth avenues? What do you see as areas as potential and growth inflection points?
Anantha Nageswaran:
The growth inflection, as I mentioned earlier to your first question I think is going to come from the resumption of the credit and capital investment cycle and the other inflection point for us has been the advancement in digital technology and digitisation of the Indian economy. But the free trade agreements that we are signing are going to help us with our energy security and energy transition and opening up markets for exporters, even though initially some of these free trade agreements may actually result in a widening of the trade deficit because we are going to lower our duties more than they do because we start from a high level of duties. And if you are a country with a trade deficit with the other country with whom you are signing an agreement, the country with the trade deficit will be the one that will give in more and therefore you will initially see imports coming in. But that should not discourage us because eventually you are creating a market, opening a market for India’s exporters. So, one of the important things I want to leave for you and your readers is, that we often think in terms of what the government should be doing when it comes to economic growth. But there is plenty that the private sector and households also have to do. I mean skilling and educating our youth is not just the government’s responsibility, it is also their own responsibility. And similarly, the private sector always looks for ease of living, lower taxes, infrastructure, etc. But they also have to invest in R&D and realise the importance of social stability for their own business stability and viability, and therefore they have to strike the right balance between labour and technology on their part, etc. And they have to pay micro and small and medium enterprises on time for the goods that they purchase. So, I think all three segments—the public sector, the private-corporate business sector and the households have to do their part to realise the economic dreams of every Indian.
Gaurie Dwivedi:
Absolutely. And that’s how we get to that Atmanirbhar and Amrit Kaal phase that everybody’s been the government has been talking about and is pushing. But thank you so much for this conversation, Dr. Nageswaran. It was important to highlight some of those aspects where the Indian economy is growing and we look forward to the next phase, as you said, 7 trillion and more, sooner than probably at the end of the decade.
