Updated: December 7, 2021 6:04:06 am
Even as India clocked an impressive GDP growth in the second quarter and is expected to do well in the long term, Abheek Barua, chief economist, HDFC Bank told Sandeep Singh that consumption has been a bit of a laggard. Stating that there is growth at the top of the pyramid, he pointed out that there are issues at the bottom. He also called for an objective assessment of damage to the informal sector and corrective measures on the fiscal:
How do you see the second quarter GDP growth, does it give you the confidence of a strong GDP growth revival?
The second half of October and November have been a little weak in terms of the broad high frequency indicators but there is enough reason to believe that the kind of traction we saw in Q2 will continue to a degree unless you have a wave of pandemic which I think is the biggest risk. For the year we will end between 9.5 and 10 per cent, which means that in the second half we would see about 5.1-5.2 per cent growth.
Which areas you think would drive growth?
In terms of some of the drivers of growth that we have seen, they remain more or less in place. The investment activity, contrary to popular perception, is fairly strong and it is coming both from the government and the private sector. The FDI flow is strong. On exports, hopefully, you won’t see a collapse due to Omicron. One of the things that is important from exports perspective is that the worst of China story is over and since it is a major destination of our exports, they will perhaps do better than anticipated earlier. While Europe has clouds of concern because of the vulnerability to COVID, we are hoping US will continue to have the aggressive growth it has seen.
Consumption will provide some support although it has been a bit of laggard. There are issues on how broad-based it is. As you go down the income scale there is a problem with consumption and that is something that could compromise the long-term growth prospects.
I also feel that supply issues will continue and that could also lead to some constraints in terms of inputs in certain categories. You are seeing problem in all semi-conductor dependent sectors and although input prices particularly commodities have come down a bit, they still remain high. They could hamper the growth in some sense.
How do you see the threat of Omicron on economic growth in the second half?
We are on track but with pandemics you don’t really know, it would depend upon the intensity of the spread. If it’s as virulent as second wave, it would be a different story. However, despite other constraints that are there, we would continue with the recovery we have seen in second quarter.
During the festive season this year, credit growth was strong and higher than 2018. How do you read it?
One of course is the fact that the festive season coincided with the re-opening and we have seen a robust recovery. We certainly saw it in retail credit growth for banks including ourselves. Also, in number of sectors that escaped the brunt of virus, there has been a lot of hiring, attrition and salary escalation and that is one pocket where we are seeing both demand for product and credit.
While one part of the economy is doing well, there is another part — the informal sector — about which we don’t really know all that much and I would be a little careful about this. There seems to be a difference in their relative performance and that is reflected across some consumer product categories. If you go down the product value ladder there are demand issues and the classic example is two-wheeler demand that has been relatively stagnant relative to cars, particularly the mid-tier and luxury segments.
Of course there has been encouraging sequential growth in consumption and overall consumption growth has been 8.6% in y-o-y terms. However, the share of consumption in GDP has been dropping. At the same time investments are moderately above the pre-covid levels, consumption on an aggregate is below pre-covid level. I wouldn’t say that consumption on an aggregate has shown as spectacular a recovery as some of the more visible segments seem to indicate. On the other hand investments have done quite contrary to what you would intuitively think. Fixed investments growth is 11 per cent and its share in GDP has gone up.
So, there been an income segment oriented economic division?
If you are looking at the pyramid, you are seeing a lot of growth at the top of the pyramid but as you go at the bottom, there are issues and I think that for India it can be a major problem, though, not immediately.
It could very well sort itself out. With investments growing, infra spending picking up, you might see more employment in construction etc and it could solve the issue to a degree.
What do you think led to this problem?
One of the problems with our economic management of COVID is that in comparison to other countries, the fiscal support was lower than the developed economies and also in comparison to some of our peer emerging economies. So, absence of fiscal support could have created problems in the large informal sector that we have. We depended a lot on credit and monetary policy to drive growth and credit delivery tends to, because of the risk issues, not reach the lower tiers of the pyramid. However, the government has considerable focus on employment generation. We have some employment intensive PLI sectors like textile and we have also have thrust on infrastructure that involves construction that is very employment intensive.
This inequality issue is a broad issue that has been there since 1991, and this has perhaps got exacerbated by Covid. It will have to be resolved to some degree through social sector schemes. Creating access to education, healthcare etc has been a priority and as more is done, it will address the inequality issue. More investments and consciously in employment intensive sectors such as infrastructure, construction will also address inequality.
There was also an argument that more fiscal support will come in line with opening up of the economy. Do you think there is a scope for it now?
Fiscal policy has two components – support and stimulus. The way the government thought about fiscal expansion was largely as a stimulus. Thus it made a legitimate argument when there was a clamour for more fiscal expansion– what is the point of providing a stimulus when everything is locked down.
There is a however a case to be made that more fiscal support, not stimulus could have been provided simply to let small units survive during the periods of containment. There is no clear answer but I would argue for an objective assessment of damage to the informal sector followed some corrective measures on the fiscal side. If the size of public debt is a problem , then we need to prune some expenditures and channel the resources that are freed to the informal sector.
How do you see the stimulus package and its impact?
One can’t entirely blame the government for going slow on fiscal expansion during COVID because of the legacy issues. We do not have the kind of fiscal space that others have and that is a big constraint. Public debt is 87-88% of the GDP and that restricts the ability to expand the fisc further.
There was an interesting marriage of fiscal and monetary policy through the provision of credit guarantees and that has worked very well for SMEs. However, the informal sector, units that exist in the where guarantees have not reached, credit delivery remains an issue.
Purely from a personal perspective but I would have liked to see more fiscal support coming and the acceptance of a little more fiscal slippage.
US fed has said that it would wind up the stimulus program faster and interest rate hike would be sooner. How big is that a concern?
Powell has actually said that lets do it faster as inflation is a big concern. I think it is not still fully priced into the market. I personally think that an accelerated taper or simply the taper itself is something that cannot be ignored and the principal impact will be on financial markets. I don’t entirely buy the argument that markets had been sensitized to the taper prospect and it was all baked into asset prices even before the taper happened
I think there is a strong long term India long story – the start-up revolution, investment in capex and infrastructure story, the renewed focus on manufacturing –that is emerging, However too much liquidity is known to create froth in assets markets. If global and domestic liquidity normalization skims off some of this froth and bring valuations that are seen to be in sync with fundamentals, it is a healthy thing though there could be some purely short term heartache.
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