India Economy: Glass More Than Half Full, Says CEA V Anantha Nageswaran — BQ Exclusive
If higher oil prices last less than a quarter, it shouldn't have a lasting impact: V Anantha Nageswaran
A real GDP growth rate of between 6.5-7.5% in 2022-23 is reasonable to expect at the current juncture, despite fresh uncertainties emerging from higher oil prices, said India's chief economic advisor V Anantha Nageswaran in an interview with BloombergQuint.
Oil prices surging to and staying above $100 per barrel acts as a 'terms of trade' shock to the Indian economy and could shave off up to 120 basis points from GDP growth, economists have suggested.
The decision on whether to allow the full impact of the higher oil prices to be borne by consumers, or if the government should take part of the hit via a cut in excise duties depends on the persistence of higher oil prices, said Nageswaran, adding that taking a policy decision amid volatile times is not the most "advisable thing to do".
"I would say that if it (higher oil prices) lasted less than a quarter into the new financial year, it shouldn't have a lasting impact."
Edited excerpts from the conversation:
The higher oil prices we have seen over the past month have multiple implications for India — growth, inflation, and current account deficit. What is your assessment of the implications?
The impact will depend not only on the level of oil price but also on its persistence. We must remember that the new financial year hasn't yet started. It is possible that oil prices will settle down in a range that is tolerable for us.
Should the current state of scarcity and prices persist well into the new financial year, then there is a range of implications to think about. For instance, if a commodity were to become supply-constrained, do we want the prices to reflect its relative scarcity or push it lower to reduce the impact on purchasing power and consumption? That's two considerations.
The third consideration is the energy transition, focus on renewables, because this will force higher blending of ethanol, which is a good thing.
And fourth, the fiscal consequence has to be considered. A couple of days ago, the government did announce the Garib Kalyan Yojana till September, which costs about Rs 80,000 crore on a six monthly basis. So, annualised it is Rs 1.6 lakh crore.
These are the multiple considerations. I can fully understand that different people will attach different weights to these considerations. I would still say that we would need to wait and see in the new financial year the persistence of the high oil price before the government thinks in terms of fiscal adjustments and balancing them out with price pass-through.
Let me delve into the first consideration, which is essentially a decision on burden sharing or who bears the burden of higher oil. One consideration there is that inflation is already on the higher side and incomes haven't recovered. Is it then prudent to allow consumers to bear the burden?
That's one way of looking at it. The other way of looking at it is that if the government does provide duty relief to at least partially absorb the increase and in the process if the government's borrowing rises and the bond market reflects that, it gets passed on to everybody and not just oil users. That's because the cost of government capital is a benchmark. So, that is another layer of cost on the entire economy.
As I said, different people would attach different weights to these aspects. Therefore, the final decision would depend on which of these factors will impinge on the economy more than the other or less than the other.
You spoke about the fact that watching for persistence of high oil prices is important. At what stage does the decision become imminent?
I would say that if it lasted less than a quarter into the new financial year, it shouldn't have a lasting impact. For instance, even two weeks ago, prices dropped suddenly from $130 per barrel to $100 per barrel, then moved back to $120 per barrel, and then came down yesterday due to news of the Shanghai lockdown. It is incredibly volatile.
In these volatile times, to make a policy decision that may or may not be reversible later is not the most advisable thing to do.
The other two issues are the growth impact and the current account deficit. Would one policy choice be between allowing the rupee to depreciate which in turn leads to an adjustment. The other is to tighten fiscal and monetary policy. How do you see the balance there?
When you have a supply shock, in terms of raw material prices, and if you respond to that with tight fiscal and monetary policy, it will obviously have a big impact in terms of growth. So, you must let the currency take some of the adjustment.
The current account deficit will widen, but because of the inherent uncertainty in making assumptions on the level and duration of the oil prices, it is difficult to say the extent of deterioration in the current account balance. But based on some assumptions of $100-110 per barrel of oil, I think the market's appetite for funding the Indian current account deficit will remain relatively good. So, hypothetically, if the current account deficit widens to about 2.5-2.8% of GDP, I still think, on balance, it will be a manageable situation.
What is your calculus on different oil price scenarios and the impact?
In general, if you have persistence of oil price at $110 per barrel and above, then that would require a burden sharing decision between oil marketing companies, consumers and the government. But if it is $100 per barrel or below, it is manageable without upsetting the current arrangement.
What is your assessment of the underlying economic conditions, particularly on the consumption side?
More than any of the high frequency indicators, I do take a look at the RBI's forward looking surveys. There, the picture is clearly subdued. I was also looking through the IIM-Ahmedabad's Business Expectations survey and they too say that demand is subdued. This reflects January information. Now, if you look around at airports, traffic, etc, there did appear to be a pick-up.
But, before we could breathe a sigh of relief on account of Omicron having been somewhat mild, this big oil price shock has hit us.
My feeling is that the first half of the next financial year will still see subdued consumption growth because there would be the fear of a recurrence of the pandemic, given what is going on elsewhere in the world. Would we get another wave or another variant? Until the cloud of the pandemic lifts over our head, consumption may remain restrained. And that would, in turn, have a knock-on effect on capital expansion plans of the private sector.
If consumption remains subdued, private investment may take longer to pick up. There is government spending we are banking on and exports. Not sure how well exports will do now. Could we hit stagflation-like conditions?
Government capex, as has been widely discussed after the budget, is definitely doing the role it is supposed to be doing, which is to keep underlying investments going and creating the basic platform on which private capex can take over.
I want to highlight one point on capacity utilisation. It is true that average level of capacity utilisation is not at a point where they would require additional capacity, but if you really look at the top four companies in key sectors like steel, cement, and chemicals, their capacity utilisation is much higher; it is 75-80%.
I saw, from a BloombergQuint article itself, that many capital equipment companies are seeing brisk order flows, and that's a strong indirect indicator that some companies are looking to add capacity.
But yes, we would need to wait for a quarter or two before the private sector begins to invest.
On exports, it all depends on the global conditions. We had a great year in 2021-22, and that's a great silver lining. However, uncertainties have increased.
So, coming back to the question on stagflation-like conditions, you have to ask stagnation at what levels. Most people assume that stagflation means economic stagnation and high inflation, which means the economy comes to a standstill. In our case, stagnation is not going to happen, growth will happen, and there will be positive delta.
Potential growth could be considered at 6-7%, private sector forecasts are coming down from double digit growth to 8-9%, some at 7.5%. Right now, it is difficult to come up with a precise number.
At the moment, I would say that 6.5-7.5% still looks feasible in terms of real GDP growth in FY23. The budget assumed a nominal GDP growth of 11.1%, which gives a very good buffer.
What is your perspective on inflation?
The numbers will be anywhere between 5.5-6%, again depending on the persistence of higher oil prices. I think we will be flirting with the upper end of the range and it is not only oil, we will have to watch for food prices as well. So, it is going to be a challenge managing growth and inflation concerns.
If we don't act at these levels of inflation, would it send a message that we are easing up on our inflation framework, which is very recent?
That is a decision for the RBI to take. I won't comment.
Let me come back to the growth side. We have managed to put the twin balance sheet problem behind us. So, if the planned government capex goes as planned, could we get a new investment cycle?
I think so. We've done all the hard work over the last two decades. The first decade was the capex and lending boom. The second decade was retrenchment and reversion to the mean. The third decade should have seen a recovery. But then came the pandemic and the new uncertainty.
But hopefully, if these conditions do settle, I expect a private sector recovery and a recovery in bank lending.
I am quite clear in my mind that notwithstanding the current uncertainties, our economic glass is more than half full. I will concede that timing has become more uncertain.
Getting the government capex piece right is important. But the levels of capex planned are high, both at the central level and the state level. Are we overestimating state capacity to execute?
State capacity is a longer conversation and an enduring issue. But you have to look at the track record of the last few years. Union government's actual capital expenditure has been rising impressively, so I wouldn't discount the possibility that we are able to either achieve the Rs 7.5 lakh crore in capex, which includes Rs 1 lakh crore in loan for states.
In fact, if you look at the RBI's monthly State of the Economy report, there has been good growth in capital spending by states, yes, over a low base.
Notwithstanding all the known issues of state capacity, the intent would definitely translate into some reasonable delta. Whether the delta is as big as budgeted, we will only know with the benefit of hindsight. But I am confident that the delta of capex spending would be reasonable for the state and central government.
Are you fearing uncertainty on state finances this year, with the GST compensation decision coming up in June? Is an extension on the cards?
It is a bit premature to talk about it.
There are so many proximate fires we are fighting, even June looks like a long time away. I am sure there will be a concentration of minds as the deadline approaches.
Globally, we are likely to see one of the steepest tightening cycles from the U.S. Federal Reserve in recent times. Markets seem relatively sanguine. Is it difficult to understand?
Obviously, the market doesn't believe the U.S. Fed will be able to walk the talk on the extent of tightening they have suggested via their projections. Nonetheless, the relative resilience of the markets in the U.S. and elsewhere is a puzzle.
I have my doubts (about the extent of tightening) because of the extent of debt these countries carry. Although, I took note of the comment from the Fed chair that they would focus on inflation management. If they do indeed go ahead with their plan of rate hikes all the way into 2023, that would definitely have an impact on global risk appetite, stock markets, capital flows into emerging economies, etc. But I have my doubts as to whether economic conditions would evolve in a way that the Fed will be able to carry out its intended rate hikes to the fullest extent they have told us they will do.
What does India need to be mindful of against that backdrop. We are better off than 2013, but what policy mistake do we need to avoid to fend off a disruptive turn on currency markets and global flows?
On balance, we should be able to manage. Should higher oil prices persist for FY23, then we have to remember that it will impact the whole world. We know about our vulnerabilities but we do not have the vulnerabilities of some of the other emerging economies with respect to food prices, etc.
What will then happen is that investors and markets would start to look at relative fundamentals. There, I think, India stands in good stead. That gives me confidence. Yes, definitely compared to two months ago or four months ago, compared to before Omicron, things are looking tougher. Before we could line up at the start line for a sprint, this situation has arisen. But India should be able to weather the storm better than other emerging economies or even developed economies.
What are the issues you believe need policy attention at this stage?
Whether it is the employment situation or the women's labour force participation issue or the MSME sector, all have been receiving policy attention. You have seen the action taken in the budget with respect to the extension of the emergency credit line guarantee scheme, the extension of the Garib Kalyan Yojana and the additional capitalisation of the Credit Guarantee Fund Trust for Micro and Small Enterprises.
So, there is complete cognizance of the challenges and that is why these actions have been taken and will continue to be taken. But when fresh uncertainties arise, they do delay the progress in the data.
There is cognizance of the problems and the need to address them, and actual decisions have been taken. But the time of impact gets pushed out due to external conditions.
