While the past few months have seen an economic slowdown, attention is now focused on what the Christmas season could bring. Will we see some kind of shift or pickup?
Chetan Aya: Yes, that’s right. We hope that the situation will improve in the coming weeks. The main reason for the slowdown in growth was a slowdown in government spending, paralleled by unusual rainfall in August, as well as some changes in the calendar, especially festivals and inauspicious periods.
Going forward, we believe government spending will be the biggest driver of overall economic recovery. Following the budget forecast shared by the Finance Minister, the implied growth in capital spending from September to March 25 should be around 40% year-on-year, significantly compared to the contraction seen from April to August. This should be a big improvement. Similarly, revenue expenditure on the government’s part should improve. But overall, growth momentum should pick up in the coming weeks, with total spending expected to rise 14% year-on-year and capital spending 40% higher.
The Reserve Bank of India is fairly confident that 7% is the norm and anything above that is what we should expect in the future. That’s the RBI prediction. But if you look at India’s real economy, rural and urban, revenue seasons so far, credit demand, passenger vehicles, we see a subtle slowdown that is starting to hit us and the Reserve Bank a quarter from now. It will be. There may be many negative surprises about India.
Chetan Aya: The current forecast is 7%. The numbers for the next two quarters are expected to be close to 7% GDP growth. But after that, we expect growth to be between 6.5% and 7%, or closer to the 6.75% odd range.
Now, especially with respect to the September quarter, there are several reasons why growth has slowed down, and all the numbers you mentioned pretty much clearly indicate that growth has slowed down. However, we believe this is a temporary slowdown and not a sustained slowdown. We should expect this number to be closer to 7%.
Another big factor is the re-emergence of dragons. I don’t know if it’s going to be that impactful or meaningful, but of course right now there’s a lot of talk about how the People’s Bank is a lot like Mario Draghi and doing everything. has been debated and many comparisons have been made. Scaffolding of war. How do you see the impact of a resurgent China on the world, especially India?
Chetan Aya: China will aim to halt this economic slowdown it is currently experiencing. They are still targeting real GDP growth of close to 5%, and we expect China’s real GDP growth to continue to improve modestly going forward. However, we do not expect it to accelerate to the point where China begins to seriously consider its impact on the rest of the world and on India. The biggest problem for China that we have focused on is deflation, and while the policy measures we have seen so far are supportive and good, they are still not enough to address deflation. Therefore, we are keeping an eye on further measures that may be announced to resolve the deflation problem.We just go back and forth between India, China, global and local. Since nothing is happening, I am going to go back to India and focus on India again. The first part of my question is that much of the heavy lifting over the past three years has been done by the government on the back of capital spending, but this year’s numbers show a slowdown in government spending. Do you expect that to pick up in the second half? Do you think this will be on par with last year’s numbers?
Chetan Aya: We can only hope that the government will be able to meet its budgetary spending targets. And if that happens, as I mentioned earlier, the numbers should show that government spending will accelerate significantly, with capital investment in particular increasing by 40% between September and March 25th. is. And what we’re looking at is during the general election period. State-level spending also slowed.
The total expenditure of the central and state governments in India adds up to about 29%. So you’re definitely going to see the effects of a slowdown in that big item of GDP, and I think that explains much of the slowdown that we’re seeing in the economy. But as I said about central government spending, it will accelerate. More importantly, state government spending should also accelerate, as there is no reason for state government spending to remain depressed. The general election had also slowed the economy, but now that it’s over, we should see an improvement in both central and state spending.
There are two moving parts: one is private sector capital investment. Last night’s RBI bulletin said private sector capital spending is picking up. Second, after a gap of almost three years, a decent monsoon has arrived and green shoots are sprouting in rural India. Will there be positive surprises on both the rural demand side and private sector capital investment?
Chetan Aya: We are aiming for further economic recovery. What we are saying is that while we have seen the urban economy pick up as far as consumption is concerned, it has also spread to rural India and we now have evidence to prove it. At the same time, what we were saying is that on the capital investment side, we see the recovery widening from public to private to public and private, and we see that happening as well.
Highlighting on capex, if you look at the growth in orders for engineering and construction companies, we expect it to be quite strong till the June 2024 quarter and that will also be reflected in actual spending in the coming quarters. .
The advent of AI will greatly increase productivity, just as we saw in the internet age and the invention of the steam engine and railroads. With so much literature, talk and opinion floating around that AI will soon increase global GDP by 1% and India’s GDP by 1.5%, are we in that situation? Is that within the realm of possibility?
Chetan Aya: So India is still a little bit behind the US, and even in the US we haven’t seen any clear evidence of productivity gains yet, which is the nature of the technology capex cycle. Back in the 1990s, it took several years for capital investment in technology to translate into productivity gains, and we expect the same to happen this cycle. Therefore, it is still too early to start talking about productivity growth in India. Because we’re not even making the capital investments in AI that the United States is actually already making today.
Let me close with your thoughts on where the economy is headed in terms of surprises and disappointments. You expect private sector capital investment to pick up. Demand in rural areas is also expected to pick up. But where do negative surprises come from? Where can you see a 50/50 situation regarding future assumptions?
Chetan Aya: The urban economy, or urban consumption, which was the driving force behind the initial recovery, now appears to be slowing. We look at car sales data from government sources daily, which shows that car sales have improved in recent days. However, urban consumption is causing some concern as there is a widespread slowdown. We’re hearing this from FMCG companies as well, but car sales also point to a slight slowdown in the urban economy.
