Anantha Nageswaran at Idea Exchange: ‘Lowering cost of doing business, making it easier to operate in domestic economy, will help absorb tariffs’

P Vaidyanathan Iyer: The tariffs on India are not as high as it is on some of its manufacturing rivals. What the US has done to India has been kind, would you say that?

As far as we are concerned, the share of exports is relatively lower in the overall scheme of things for the economy. The numbers tell their own story in terms of the reciprocal tariff. It is very difficult to say that one is better or worse off. I wouldn’t want to go into that relative argument. But the overall sense of uncertainty is more important and that is difficult to quantify.

P Vaidyanathan Iyer: The RBI Governor (Sanjay Malhotra) spoke of the uncertainty these tariffs have resulted in; he said this is negative to growth, negative for global trade, and India isn’t insulated from this.

Yes, because you need to look at the first round, second round and third round effects. It is not just the exports to the United States, but to what extent you are able to absorb and to what extent the consumers are able to absorb in the US. Is there a combination of the two that works? That is one part. The second part is, if there are other countries who are affected by this, are you better off or not, because if there are other countries which face a fairly difficult tariff structure and they have a much higher share of exports to GDP and if they are affected, then our exports to those countries can also be affected.

“Globally, we have come to understand that interest rates have a very limited role in spurring capital formation” says Nageswaran (Express/Praveen Khanna)

In that sense, it is difficult to talk about this in relative terms. Then, the third thing will be, of course, the continued reaction in the financial markets which will also have its own spillover effect on sentiment and consumption because of the wealth effect it creates on the downside. So these are all the factors that will, in some combination or the other, have an impact on the growth outcomes this year.

P Vaidyanathan Iyer: What are the other levers, domestically, that the government would rather focus on?

Whether we like it or not, the external environment is a given. The other lever is the silver lining in the situation — the energy price. Right now, crude oil prices have dropped quite a lot. If you recall, when the NDA government came to office in 2014, for two years, there were droughts, but then the energy price dropped significantly and that played a big part in keeping the growth rate up in those years. I think the onus is on the private sector to understand that we have a fairly large domestic economy, which can have a self-sustaining sort of combination of investment and spending and savings flowing back and reinforcing each other. We should not lose sight of it. From the policy perspective, we need to make it easier to operate in the domestic economy, lower the cost of doing business, which will also help absorb the tariffs. Deregulation is something we have spoken about.

P Vaidyanathan Iyer: So, what is the onus on the private sector? To invest more?

Globally, we have come to understand that interest rates have a very limited role in spurring capital formation. Interest rates spur real estate investment, real estate related purchases by households boost consumption spending more than they boost investment spending. So, that is the role that interest rate cuts play. We have had two rate cuts and we have also heard from the central bank that they are in an accommodative mode now. Hopefully, that means further rate cuts, subject to how inflation behaves. So, there will naturally be some fillip at the margin, some relief in consumption spending which should give visibility to corporations on capital formation.

But demand visibility is an endogenous thing. It is not exogenous and that is why in the private sector, one should see enterprises and households mutually reinforce each other. It’s a loop. We know that the government and the external sector are an exogenous system and so the government has given a tax cut. Now, the external environment has given both tariffs and substantially lower energy costs. The central bank, in some sense which also can be considered an exogenous player, has given a couple of interest rate reductions of 50 basis points in total. So, there is a little bit of endogenous action that the commercial sector should do now, to underpin growth.

Anil Sasi: How important is it to see domestic consumption pick up and for the private sector to restart investments?

There are only two or three options for boosting domestic consumption. One is you give cash transfers which are happening and tax relief, which has been done. The third thing is you basically boost their intrinsic purchasing power which is through wages. There are not too many other variables by which you can boost disposable income, that comes through hiring and compensation. We have seen that external factors have also played a big role in creating this investment uncertainty. If these external factors are addressed by the ongoing tariff developments, to some extent that also relieves a bit of the fear of excess dumping, excess capacity.

On the private sector’s role | We have a fairly large domestic economy, which can be self-sustaining, with a combination of investment and spending and savings flowing back and reinforcing each other

Maybe in a few months, we can look back and say that some of the uncertainties that were holding back private sector capital formation may have actually been relaxed at the margin with these developments. I would still say much of it is actually self-reinforcing.

Anil Sasi: In 2018, there was a decision taken in the National Electricity Plan to stop all new thermal projects. In hindsight, do you know how detrimental that decision was?

I really can’t comment on that because all we can say is that we are still adding capacity on coal but I do not know whether we put a moratorium on ourselves not to add anything more. In the Central Electricity Authority projections for power supply until 2032, coal is still there. We need to think more than coal at this point, of course, but if CCS (Carbon Capture and Storage) technologies are developed, then coal can still continue with CCS. But right now the focus is to get the share of the nuclear energy up from where it is today.

Anantha Nageswaran (Express/Praveen Khanna)

Deeptiman Tiwary: At a time when private investment is low despite skyrocketing profits, wages have stagnated, consumption is being maintained, middle-class consumption is largely being maintained on debt and there may be a global recession unless this tariff war eases out, do you see a compression in consumption in future in India? What could be the impact on growth?

Based on some of the developments that you laid out, those things will logically lead to the conclusion that consumption will be hit. But as I said, there is also a tax cut that kicks in this year and there is also a huge energy price drop which can be passed on to them. So these factors can also play an offsetting role. And then if some of the external pressures are released because of the ongoing developments with respect to tariffs, then I think one can actually see a fairly positive scenario where private capital spending, actually increases this year compared to the previous year. So, it is quite possible to envisage a scenario where maybe one quarter down the road into the current financial year that we are able to see at the margin a dissipation of those uncertainties rather than a strengthening of
those uncertainties.

Harish Damodaran: The 2024 Economic Survey acknowledged the Chinese Conundrum, of China’s dominance in global supply chains and today you are saying that China is the elephant in the room, not Trump.

I think there was some misunderstanding. Looking at India’s import dependence, we said that it creates vulnerability because we are dependent on very critical supplies.

If you look at the mix of imports coming from China, much of it was capital goods. So therefore, how do we balance this dependence? We were coming at it from the perspective of how do we reduce India’s strategic vulnerability. Then there is another dimension. When we talk of imports, we also forget that some of those imports could be coming from foreign manufacturers located in China who export to India and other countries. So maybe a relatively lower hanging fruit will be to attract those manufacturers as we are doing in the case of Apple, for instance.

On Chinese imports | Some of these imports could be coming from foreign manufacturers located in China who export to India and other countries. We shouldn’t think that it’s only Chinese manufacturers

Harikishan Sharma: Over the last six years, more than 80 lakh families are working at MGNREGA sites. This demand is coming from states like Bihar, Andhra Pradesh and Maharashtra. What could be the reason for this rural distress while the economy has opened up after Covid?

I think we wrote about it in the economic survey too. There is a certain asymmetry. Rising MGNREGA demand is not necessarily a sign of rural distress, whereas a falling MGNREGA demand is definitely a sign of dissipation of rural distress.

Sukalp Sharma: When we talk about energy costs, there seems to be a sort of reluctance by the government over the past few years of passing on those benefits directly to consumers.

We have to wait and see. Based on the US administration’s priority, will this lower oil price sustain? You have to be sure about the durability of the price decline.

Sukalp Sharma: But, historically, if you go back to 2016, 2017, 2018, whenever headroom was available, the first priority was — instead of passing it on to the consumers in the form of lower retail prices — the government hiked excise duty.

I think it was a combination. So, there was a certain sharing of benefits of lower crude oil prices between the government and the consumer. But, in 2014-15, the government inherited a fairly large fiscal deficit. So, the initial years were about restoring macroeconomic stability. Post-Covid also, the combined fiscal deficit of union and state was 12.2 and the union government was 9.2. Let us suppose that the fiscal deficit had come down more slowly. As a consequence, if the 10-year bond yield of government borrowing cost, currently which is about 6.5 per cent, had been at 7.5 per cent or so, then private sector interest rates would also have been much higher. So, households and businesses would have also faced the consequences of that high prices in a different form. If so, we need to look at this from a holistic perspective.

Amitabh Sinha: A lot of our previous energy choices were dictated by pressure from the international side, to take a certain path for renewables, for instance. Now with those structures weakening, is this an opportunity for India to maximise its energy choices?

Climate change is a reality and we need to diversify our energy sources for our own sake. But to the extent that the discourse was heavily weighted in one direction, it did crimp the choices of a sovereign to determine pace, sequencing and priority given to adaptation versus emission. I think that would help align our climate goals better with our growth priorities.

On energy sources | We need to think more than coal but if Carbon Capture and Storage technologies are developed, then coal can still continue. But right now the focus is to get the share of nuclear energy up

Harish Damodaran: In 2014, when oil prices fell, it imparted some kind of a trade shock in a positive way. Now we see it with food prices. We had an extended period of high food inflation. Now with Brent Crude dropping to $60 a barrel, do you think this can spur consumption?

Whether or not the lower prices of crude oil get passed on, it would definitely have implications for inflation calculations. I think it at least opens up the space for more monetary accommodation. To that extent also, there is a relief that households and businesses get indirectly.

Ravi Dutta Mishra: Now that we are stepping into the global export game, we will get a share of trade diversion. So, how well should we manage inequality?

We are a country with a large domestic demand component. Yes, to some extent we rely on cheap imports from China but are we investing enough in domestic R&D? Or if we find another alternative supplier who may be slightly more expensive, do we take that and indigenise it? As US Vice President JD Vance said, pay your workers well but compensate for it through innovation and productivity. Are we doing all of that? These are the questions that will become more binding for us.

Prasanta Sahu: You have projected about 6.3 to 6.8 per cent for the current financial year. Post-Trump tariffs, does that estimate require a rework? My second question is about investment rates. Given that the Centre’s capex is at around three per cent of GDP. Going forward, we are looking at an investment rate of 35 per cent or more to meet the goal of making India a manufacturing hub. Will that addition come from the private sector?

First of all, that is not an official target. Capital formation is both domestic and external — FDI — put together. So either because of domestic savings not rising or because external savings not supplementing it, if we are to raise the investment rate only to 32-33 per cent of GDP, then the answer lies in shortening the time it takes from converting the investment into output. In other words, investment efficiency and lowering of the ICOR (Incremental Capital Output Ratio) ratios is the way to go. So the answer doesn’t necessarily lie only in raising the investment rate. The other answer is to boost investment efficiency and that is where the deregulation bit comes into play and how quickly investment translates into output.

As for your first question, I am grappling with both, the threats we are facing and the additional opportunities that have opened up. So, I am not sure I have to actually downgrade my numbers.