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00:00As we step into the third term of the Modi government, it's interesting to get a variety
00:15of voices on what can be expected.
00:18And the next person that we're speaking to is a complete authority on the Indian economy.
00:23We're speaking with Pranjul Bhandari.
00:26She is a chief India economist at HSBC.
00:29Pranjul, great to speak with you once again on NDTV Profit and have you back on.
00:34Since this is top of mind, let me begin with your take on Modi 3.0.
00:40I mean, markets had their own expectations priced in, which is why we saw the wild gyrations
00:44during result week, etc.
00:46But now that that heat and dust has calmed down to some extent and we're back to business,
00:52interested in knowing your take on what exactly do you hope to see from the third term of
00:58the Modi government?
00:59Well, you know, I'll talk about what I think we'll see.
01:03I think we'll see a lot of continuity.
01:06I think a couple of things that Prime Minister Modi really championed over the last couple
01:11of years will continue.
01:13And these include things like, you know, a push to public capex, now true when you're
01:17bringing down the fiscal deficit, you don't have too much cash available to do more and
01:22more infrastructure.
01:23But you can open the public sector enterprises, which haven't been doing too much, you know,
01:28in from over the last couple of years.
01:31So overall, that public sector capex push remains, even though a lot more happens, you
01:36know, from the public sector enterprises than the budget outlays.
01:39You know, I see a lot more of the support to futuristic sectors to continue.
01:44We started with electronics, semiconductors, perhaps more of EVs and green hydrogen going
01:52ahead, data centers, artificial intelligence, my senses, you know, all of that, you know,
01:57will continue.
01:58And also an eye on macro stability.
02:00Now, this government in the past has shown as much love for macro stability as it has
02:05for growth and things like gradually bringing down the fiscal deficit to make sure that
02:11over time inflation aligns with target.
02:13I think all of these things which are needed to ensure growth stays high for multiple years
02:19and not just one or two years, I think that focus will continue as well.
02:23So a lot of business as usual, and my sense is this kind of reforms aligns or maps with
02:30a GDP growth number of about six and a half percent over the medium term, over even a
02:35five to 10 year horizon.
02:37So I think we're still on that track where I thought we were a month ago.
02:42Now, a few things that I think may not happen as much, and one of them is legislative reforms
02:48like farm laws, land laws, labor laws.
02:52But the truth is we were anyway not doing it in the last couple of years.
02:57So my sense is, you know, that part, maybe, you know, I would love to be surprised on
03:01the upside, but perhaps we'll remain a bit slow.
03:04But all the other things which I think happen by executive action, like public capex and
03:08so on and so forth, I think that continues.
03:10Okay, so that's a great sort of, you know, setting the stage for what could be expected.
03:15Let me come to you on a couple of specific things.
03:19One is the kind of spends that we would see in schemes that sometimes are described as
03:25populist as a response to the election result, which has seen a continuation in government,
03:31no doubt, has seen Modi become prime minister for the third term, no doubt, but with the
03:35help and aid of allies.
03:38Now, while, you know, people are trying to decode what the election results are saying
03:42in terms of rural distress, et cetera, do you see more spends directed in putting more
03:48money in the pockets of rural Indians and urban Indians, also the middle class, et cetera?
03:54Well, look, this is a government which wants to bring down the fiscal consolidation, which
03:59wants to bring down the fiscal deficit and follow a fiscal consolidation path.
04:03And I don't think that's at risk.
04:04I think that is something that will continue.
04:07But within the boundaries of fiscal consolidation, whenever the government gets access to some
04:13more revenues like it has in the last couple of months, you know, it's got 2 trillion rupees
04:19of RBI dividend.
04:21It wasn't expecting that much.
04:22Then I think a part of that will go for welfare spending.
04:26Now, my sense is that the RBI dividends are priced on the upside by about 0.4% of GDP.
04:32And my sense then and today is that about half of that will go for welfare spending.
04:37When I say welfare spending, I don't mean any new schemes that will bankrupt the government.
04:42I basically mean just replenishing some schemes that were already there but had been under
04:48provision for in the interim budget that would be better provision for, you know, in the
04:53next budget.
04:540.2, 0.3% of GDP doesn't really move the needle.
04:57You know, it's not a profligate budget, irresponsible budget at all.
05:01So my sense is yes, within the fiscal consolidation path.
05:04The second thing that doesn't really cause the government too much but can add to growth,
05:09can add to social welfare is spending more regularly.
05:13You know, what we saw over the last couple of years was the government trying to do some
05:16reforms on digitization of payments, even government payments.
05:20And because of that, regular payments were not being made.
05:24And a lot of our tax revenues which the government was collecting was lying locked up with the
05:28RBI for 10-11 months in a row.
05:31Perhaps spending that a little more regularly, finding out a mechanism to do that.
05:36You don't spend any more, you just spend more efficiently than before.
05:40I think that could also be a part of the strategy and I think we would be lucky to have that.
05:45You know, another thing that this government needs to be seen to be doing is working constructively
05:52on creating more jobs.
05:54Now, at the end of the day, the issue of quality employment became, you know, a rallying cry
06:00during the election.
06:00It comes up once every few years.
06:02But what are the kind of schemes they could announce or what is in the boundary of what
06:08government can actually do to, you know, create more jobs or seem to be working towards creating
06:15more jobs?
06:16Look, I think at the end of the day, it's all about getting more reforms done.
06:20You know, the things like, which are difficult, which are controversial, like farm laws, labor
06:25laws, land laws, all of these, getting all of this happening, I think is probably the
06:31most important thing.
06:33I'm going to take a step back and quickly explain how I look at it.
06:35You know, I think about it as two India's, new India and old India.
06:40New India is fast growing.
06:41It has high tech manufacturing.
06:43It has services exports.
06:44It's 15% of GDP.
06:46It has been growing at 15% per year, really driving growth.
06:50And I think that part of India continues.
06:52The only problem is it doesn't create as many jobs.
06:55And then you have the old India, which is 85% of GDP.
06:59It comprises agriculture and small firms, and it employs a bulk of India's people.
07:04And it has not been growing as rapidly.
07:07The challenge is to lift old India.
07:09So you either lift old India via reforms, land, labor, ease of doing business, farm,
07:15or mechanisms via which private sector and new India can lift old India, like access
07:21to credit, fintech, agritech, things like that.
07:25And honestly, we need all of this to come together.
07:28But eventually, I think India's jobs problem will continue until we do some of these more
07:33complex reforms and get these bills passed in the legislature.
07:36Yeah.
07:36Yeah.
07:37So getting the bills passed may not be that tough right now, at least with the majority
07:41they have in the Lok Sabha, Rajya Sabha.
07:44We'll, you know, we'll have to wait and see how elections also pan out in states.
07:47But I want to come to the point of the next budget, Pranjula.
07:49And I'm keen in knowing what you think in terms of where the government capex outlay
07:55will lie.
07:56We saw a muted number, as expected in the interim budget, the big guns being reserved
08:01for July.
08:02What is your own estimate at that number?
08:04And do you think fiscal deficit targets will be met?
08:08Well, look, I don't think, you know, anything was reserved in the interim budget.
08:12You know, capex still had an outlay growing 17 percent year on year.
08:16This is at a time when your fiscal deficit is being bought down sharply from 5.6, 5.8
08:22percent to 5.1 percent.
08:24Despite that, you had a thrust on public capex.
08:27So it was clearly a priority of the government in the interim budget.
08:30And my sense is that outlay number is not going to change in the final budget that we
08:35see, because it's anyway a pretty impressive number.
08:38So really no changes there.
08:41A little bit of social welfare, perhaps, you know, 0.2 percent of GDP or so.
08:45Nothing that is, you know, out of the charts, I think quite a responsible number.
08:50And overall fiscal deficit target being met.
08:52You know, we had a we put it by 25 as a target of 5.1 percent fiscal deficit.
08:57And my sense is we may actually even better it.
08:59We could do like 5 percent.
09:01And that would be a upside surprise to the bond market.
09:04So my sense is that the budget will continue to show a responsibility, you know, bringing
09:10down the fiscal deficit while still, you know, having a soft corner for public capex.
09:15I think that will continue.
09:17And I think that's the best signal you can even give for the RBI, that the fiscal is
09:20doing its job now.
09:22Monetary policy doesn't have to worry about fiscal and monetary can think about its own
09:26inflation management.
09:27Yeah, no, we'll come to RBI because we heard from the governor last week.
09:31And, you know, it's interesting to see what cues we're getting there.
09:35But just one more on this point on the economy first, Pranjula, and I want to get your view
09:40on private capex.
09:41Now, that's sort of the X factor, which, you know, we've been waiting in the wings for
09:47it to actually kick up.
09:48It's showing signs of revival, no doubt.
09:51Do you see enough out there for private capex to really kick up a notch now?
09:58Yeah, you know, that's a tricky question, to be honest.
10:02There's domestic capex in the private sector and foreign capex.
10:05I think domestic capex, parts of it is growing, but on the whole, it's not growing at a big
10:11rate.
10:12And I think one of the problems is that India's capacity utilization is still low.
10:16It's still as far we are data about 75 until it goes to 80 or higher.
10:22I don't see how domestic private capex can really come up in a major way.
10:26And if to some extent welfare spending can improve mass consumption demand, then maybe
10:32over time we can see capacity utilization rise and private domestic capex come in.
10:38So in a way, a little bit of welfare spending today could be a good thing to bring in private
10:42capex over the medium term.
10:44That's one part.
10:45The other part is foreign private capex.
10:48Now, foreign private capex hasn't been that great.
10:50You know, we've seen FDI fall in India.
10:52We've actually seen FDI fall in many parts of the world because the FDI part globally
10:57has shrunk.
10:58The hope is that over time it rises back up.
11:02We are seeing a lot of investment intentions happening in India, but India will have to
11:07keep wooing this FDI, you know, with ease of doing business improvements and things
11:12like that.
11:13I think they have to keep wooing this FDI to come into India because to be honest, there
11:17are many countries wooing for the same pot of money.
11:22So I think my short point is that for both domestic and foreign private capex, we really
11:28have to work harder to get it really rolling.
11:32And do you think things like the PLI scheme will help?
11:35Everyone's waiting to see the 100-day agenda first unveiled, and the PLI scheme has seen
11:40substantial success.
11:41So more in the same direction on the point you made on FDI?
11:46I think so.
11:47I think we'll see, you know, a continued focus on PLI scheme.
11:51Now, remember, it's a new scheme, and every time the government is learning a few lessons,
11:56I think there were issues on availability of imported inputs, visas for engineers from,
12:03you know, other parts of the world.
12:04And I think all of those parts will get addressed in the next couple of months.
12:10So, you know, my sense is we might see a little bit more uptick in the PLI success
12:15than we have in the past.
12:17Let me come now to the question of monetary policy.
12:20And you've laid it out beautifully on, you know, what we could see on the government's
12:25side and in terms of the FISC.
12:28But now, where does monetary policy lie?
12:30So on the 7th of June, for the eighth consecutive time, the RBI held its rates as was widely
12:37expected.
12:38Inflation is pegged at about four and a half percent for this financial year.
12:42Where is the trigger going to come from, Pranjal?
12:45And are we going to see the RBI sort of wait for the Federal Reserve to move possibly in
12:52September on rates?
12:54What is your sense here?
12:56So, look, two big changes happened on the Friday monetary policy.
12:59Number one, for the first time, the RBI governor questioned the principle of following the
13:04Fed.
13:05Like, why should we follow the Fed?
13:06Our external accounts are pretty well buttressed.
13:08We have a large stock of FX reserves.
13:11So that was a very interesting sort of new sort of statement that the RBI governor made.
13:18And the second was that two members of the MPC, the external members, voted for a rate
13:23cut and a change in stance compared to just one in the previous meeting.
13:29So I think this puts a little bit more pressure on the other MPC members that, hey, what are
13:32these people saying which we are not seeing?
13:35So I think both of these were sort of very strong underlying currents pointing towards
13:40little more RBI dovishness going forward.
13:43My sense is RBI will be looking at three things going ahead before it starts cutting.
13:47Number one, the monsoon rains.
13:49If they continue to be strong in June and July, sowing is good, then it can make a case
13:54that one year ahead inflation will actually begin to fall.
13:58And I think that will lay out the path for rate cuts.
14:02Second, the budget.
14:03If the government follows the fiscal consolidation path, then that will give more confidence
14:08to the RBI on monetary policy easing.
14:11And third, neutral rates.
14:13Now, this is a slightly academic concept, but at every point in time, RBI has an estimate
14:18of where the real neutral rates in the economy should be.
14:22And vis-a-vis that, we in the markets figure out if there is space to cut or not.
14:26At this juncture, some of the old estimates of the RBI have become outdated.
14:31The RBI has promised that in the next month or so, they're going to release their new
14:36estimates of neutral rates.
14:38And that will give us a sense if there is space to cut or not.
14:41If all of these three factors align, then my sense is that as early as August, we could
14:48get indications of looser monetary policy.
14:50Even if the cut doesn't happen in August, it happens in October.
14:53My sense is if these three factors align, the first indications will be available in
14:58August.
14:59So the first indications could come in in August.
15:02I think that sort of shift in parameters of why should we wait for the Fed is very, very
15:09important, as you explained, Pranjal.
15:11But having said that, does inflation really seem like it's benign?
15:17Because especially food inflation tends to be a little unpredictable.
15:20We have a good monsoon predicted for this year.
15:23It started off fairly well.
15:24Do you see a bit of a question mark or a bit of a challenge on that end?
15:29So look, core inflation, which is the part we've always been very worried about, has
15:33come off quite sharply, you know, under 4%.
15:37And that's in a good place right now.
15:39The problem is food inflation, which is extremely elevated.
15:42But remember that, you know, one or two items can cause havoc.
15:46Like, for example, vegetable prices growing 30% can really lift inflation.
15:51But we also get a new vegetable stock every two to three months.
15:55So inflation comes down as sharply as it rises.
15:59I think eventually the RBI really needs to monitor rains.
16:02It needs to monitor sowing, not just of vegetables and horticulture, but also of cereal and pulses,
16:09which have also been a little more inflationary.
16:11And if they are in terms with normal or surplus and rains are supportive, then my sense is
16:18a case can be made that over the next three to five months, food inflation will begin
16:23to fall.
16:24And on the back of that, the RBI can cut rates because anyway, transmission takes about two
16:29to three quarters.
16:30So if you're going to anyway see inflation fall in five months, might as well, you know,
16:34cut, cut, cut now.
16:36My point being, if monsoons are good, the RBI would rather it cut sooner than later.
16:42What are the rate cuts you're pencilling in for this year?
16:4550 basis points.
16:46So taking the repo rate from 6.5% to 6%, I think is what we have.
16:51So it's a shallow rate cutting cycle because, you know, given our inflation and our growth,
16:56we probably don't need that much.
16:58We also didn't hike that very much.
17:00So my sense is 50 basis points is pretty much, you know, what we have space for.
17:05Till the end of the calendar year.
17:07That's right.
17:08Okay.
17:10Just to get your sense on where we see the Fed moving, because that's, and if we de-link,
17:15it's actually good because that's the one factor which is becoming very difficult to
17:19predict.
17:20Are you on board with the September rate cut outlook?
17:24Yes, that is a house view to have, you know, one rate cut this calendar year in September
17:30and in three next year.
17:32So over a one-year horizon, we have four rate cuts.
17:34Yeah.
17:35So when the Fed moves four times, RBI moves two times, is how I see it.
17:40Okay.
17:40Okay.
17:40That's an interesting sort of indicator.
17:43Just, you know, as we wrap up this fascinating conversation, Pranjul, want to get an overview
17:48from you on what are the challenges that India is going to be seeing economically?
17:53Do you see a resurgent China as one in the context of attracting FDI and FII flows?
18:02Do you see geopolitical issues as a big headwind or are we rather secure in where we're heading?
18:10Well, look, it's an ever-changing global backdrop.
18:13And I think what India will have to do really well is to basically have a very outgoing and
18:19bold foreign policy, making friends, having trade and investment pacts, like, for example,
18:27we've been having with the Middle East.
18:29I think India has made a lot of effort to woo the Middle East, Europe, the US, and I
18:35think all of that must continue.
18:37But at the same time, we have to think very carefully about our own industrial policy.
18:43At this point, we want to focus on many PLI sectors, but we are also increasing import
18:48tariffs.
18:48We have to bring down a lot of import tariffs because for PLI to succeed, they need access
18:54to cheaper imported imports.
18:56So I think we really need to align our taxation with the industrial policy that we are talking
19:02about.
19:02So I think we really need to think through all of these very clearly and then woo more
19:09foreign partners because that's the way to go.
19:12All right.
19:12Thank you so much, Pranjal Bhandari.
19:14Pleasure as always to speak with you and hope to chat with you soon.
19:18Great to be here.
19:18Thank you for having me.