Madan Sabnavis: ‘Changes in the West will affect our trade’

We keep saying that India’s economy will grow at over 7 per cent. We have had these dreams of making India a $5-trillion economy, a $10-trillion economy, a developed nation with various targets. So when we got this number of 5.4 per cent for the second quarter, personally, I was a bit surprised because we were anticipating around 6.6-6.8 per cent.

The economy is broadly divided into three parts: the primary sector, or agriculture, the secondary sector, or industry — which includes mining, manufacturing, and electricity — and the services sector, which includes trade, transport, communications, the financial sector, real estate, and public administration.

When you look at the breakdown of all these sectors, we see that agriculture has been doing well, and this was before the Kharif harvest, which takes place from October onwards, in September, but primarily in October and November. In services, too, people are spending a lot of money.

But in the industrial sector, we saw that growth came at around 2.5 per cent, which is very anaemic. A deep dive into manufacturing reveals that it is primarily a demand problem. Multiple FMCG companies, primarily the MNCs, have attributed this to urban stress. We know of rural stress, which is when the monsoon fails. Similarly urban stress, I think, implies a fall in demand due to higher prices or higher inflation. This may be because the input costs for companies have gone up ever since the Ukraine war in 2022, and they have been holding back on increasing the final prices of their products. Over the following years, from the end of 2023, they have begun increasing product prices.

More importantly, we have seen that while inflation has been in this region of 5.5-6 per cent, food inflation in particular has been double digits. Due to high food inflation, we spend more money on necessities, and there is less money left for discretionary spending. So we spend less on manufactured goods. People were spending less on products like mobile phones, television sets, toasters and other kinds of household goods. Automobile sales were also lower in September.

Also, in September, we have this period called Shraddh. This happens for around two weeks every year. If you’re a devout Hindu, you follow this practice of austerity and don’t buy any consumer goods. People do not buy automobiles or mobile phones, because they think it’s inauspicious, and must wait for the good times. So in September, even before the corporate results came out, we saw that auto sales were down, but production was higher and inventories had built up. Going into October and November, we saw that all these goods actually got sold in a month. So this has also contributed to the lower growth which we have seen in the manufacturing.

Now, surprisingly, when you look at services, we see tourism and hospitality doing very well. A lot of people were going for what we call experiences and travelling, regardless of their income level. Depending on your wallet, you went to a place, you stayed in a hotel. So the hospitality industry did very well in all three months.

Overall, 5.4 per cent is not bad when we examine the numbers. It’s a fairly okay number, especially when we look at what’s going to happen in Q3 and Q4, which we believe will be different.

On economic prospects in Q3, Q4

We have seen a lot of turnaround signs. Different economists see differently. If you want to get the right picture of what’s happening on the consumption side, look at the data. For instance, look at the GST collections. GST is a consumption-based tax. GST collections have been over Rs 1.8 lakh crore in October and November. This can no longer be attributed simply to compliance — people are obviously spending money. It’s partly because of A, we’ve had a good kharif crop, we have seen rural spending picking up, and B, this is also the festival time when typically people tend to spend a lot on gifts, on products, on household products. Based on this, I believe consumption has picked up in Q3. And as consumption picks up, there’s normally a case of saying that investment also increases.

Investment data is not readily available, but we can look at the CMI database on investment intentions. Between April and June, there were hardly any announcements because the elections were going on. The private sector always likes to wait and watch, irrespective of their perceptions of which government will come to power. But if you look from July 1 onwards till date, it has been amazingly high. If I compare it with last year, there are signs that investment, particularly private sector investment is picking up. I see that as a positive.

Finally, if we look at Central government expenditure, it was lagging primarily because of the election. Also, by that time you have all the ministries together, you decide to push forward your projects. The data we get up to October shows that there’s not been too much movement compared to last year. So if you look at what has been the overall capex expenditure, Rs 11.1 lakh crore, and see what percentage — if I remember right, it’s a little less than 50 per cent has been spent. Compared to last year, it was about 50 per cent. So therefore there’s been some kind of a lag when it comes to government expenditure on capital on projects.

Now this to my mind is something which is going to change. I say this because if you look at the kind of determination the government has shown in the past, based on experience, it looks like that will be very much close to the Rs 11.1 lakh crore, which is supposed to be spent by March. This means our shortfall has been there up to October and is something we are very confident will be made up. This is why we think growth in Q3 and Q4 would average a little above 7 per cent.

Looking at the growth rates so far, averaging at 7 per cent in Q3 and Q4, we would end up with around 6.6 to 6.8 per cent, which I think is fairly reasonable and shows stable growth. This is still lower than last year, so we should admit that our growth number, compared with other economies, will still be impressive. But we are still lower than the 8.2 per cent we got last year.

On effect of geopolitics on growth

I speak about geopolitical developments beyond politics. We talk of wars and invariably, the question is what happens to crude oil prices? We saw it increase when the Ukraine war began. When the Israel-Hamas conflict started, we all expected crude oil to rise again to $120-130 per barrel. However, very little happened. The world has adjusted to these geopolitical problems. So I see geopolitics as less of a risk. World Bank data estimate the crude oil price will remain at $70-80 per barrel for 2025. Going ahead to 2026, we’ll be in the same range. So I think today the global economy is quite insulated from the politics of these physical battles that take place.

With this, when I speak of the other part of the external world, I think there is concern about what will happen when Donald Trump becomes the President of the USA. There was a lot of messaging around the US election restricting migrants or threats to impose customs tariffs or lowering the corporate tax rate.

This would mean that US inflation will increase because if it gets rid of labour, I have to pay higher wages, which costs inflation. If I’m talking in terms of cutting corporate tax rate, the budget swells, higher borrowing, inflationary potential. I increase custom tariffs, automatically there will be inflation. I see this as one major problem which all countries are aware of. We don’t know how much of this will be implemented, or to what extent India will be affected. But given the fact that America is our major trading partner, this is a concern from the point of view of exports.

On the other hand, we know that when all this happens, China is not going to sit back. They’re going to try and push forth their own exports. So how are they going to do it? You’ll let the currency depreciate, which they’re doing already. They will give us stimulus. They will try and produce more goods and dump it in other territories. This is the concern we have on the trade front. So geopolitics through what happens in the Western nations, in particular, the US will affect us on the export and import fronts. On the currency side, we have already seen that the dollar has been strengthening at the expense of all other currencies. It is now left to the Central bank to decide what extent it will go and defend the rupee. In doing so, the RBI will need to take a call on drawing on its foreign reserves. This presents another conundrum.

Audience Questions

What led to a slower growth in the current year?

In the current year, the industrial sector has under-performed. And within the industrial sector, we have mining, manufacturing, and electricity, which were handicapped a high base effect. Urban demand came down. There was a festival effect which probably kept some part of the demand down. So that is what contributed to slow growth in manufacturing. Otherwise, the services sector has been doing exceptionally well. That is quite contrary to what we have seen in manufacturing.

Can policy enhance resilience to geopolitical challenges?

From the point of view of policy, we can counter the negative impact of what happens to currencies. This is where the RBI will need to take proactive steps. A decision that has to be taken is how to ensure that the rupee does not slide down too much. I don’t think monetary policy per se, that is the repo rate we’re talking of, is something which will help to counter it. What could happen in America is something concerning physical goods, which would be impeded or become more expensive if tariffs were imposed.