Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: This is a podcast from HSBC Global Research, available on Apple Podcasts and Spotify.
Speaker: Search for HSBC Global Viewpoint or join us via the HSBC Global Banking and Markets page on LinkedIn.
Speaker: However you're listening, analyst notifications, disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Welcome, I'm Fred Newman, Chief Asia Economist at HSBC and you're listening to Under the Banyan Tree where we put Asian markets and economics in context.
Speaker: This week we're putting the spotlight on India, continuing our theme of Asian economies on a positive track despite the various dark clouds that are raining on the global macro parade.
Speaker: Joining me from Mumbai is our Chief Economist Pranjul Bhandari.
Speaker: We've got plenty to talk about, so let's start the show.
Speaker: Well, with growth averaging 6% every year for the past decade, there's no doubting that India's economy has long been on a positive track.
Speaker: But in the current climate, certain stats make particularly impressive reading.
Speaker: For one, its benchmark stock index, the Sensex, has actually risen over the past year.
Speaker: Compare that to the S&P 500, which is down around 15%.
Speaker: Inflation remains a challenge, but with foreign direct investment close to record highs, there are clear signs that investors are optimistic on the macro outlook.
Speaker: In fact, India just overtook the UK to become the world's fifth largest economy.
Speaker: So let's bring in Pranjal to help us put all of this into context.
Speaker: Pranjal, welcome to the podcast.
Speaker: Hi, Fred.
Speaker: Great to be here.
Speaker: So Pranjal, help us set the scene a little bit on India.
Speaker: We had clearly a pandemic that hit India hard.
Speaker: We've seen soaring oil prices.
Speaker: How has growth held up in recent quarters?
Speaker: Yeah, I think 2022 has been good for growth so far.
Speaker: You know, we came out of the lockdowns in March and ever since consumption is rising as households are consuming services which they were not able to consume in the last couple of years.
Speaker: There has been a huge amount of formalization over the pandemic period.
Speaker: Tax revenues for the government is very high.
Speaker: The government is spending it, particularly on public capex, which is very encouraging.
Speaker: And on the sidelines, even private capex has begun to recover a bit.
Speaker: So overall, I would say the last couple of quarters have seen decent recovery coming out of the pandemic.
Speaker: So we're seeing decent recovery out of the pandemic, but then the global economy, there's sort of very dark clouds on the horizon.
Speaker: We've seen certainly the Fed raise interest rates very rapidly.
Speaker: We're also seeing a slowdown in global trade.
Speaker: How does that affect the Indian economy overall?
Speaker: How worried are you about these trends and the impact on growth in India?
Speaker: Yeah, I do think that the next couple of quarters will see growth softening.
Speaker: And the primary reason will be exports.
Speaker: A lot of people don't realize this, that exports is a very important driver for India's growth.
Speaker: In fact, coming out of the pandemic, exports has been the biggest driver of India's growth recovery.
Speaker: So if global growth slows, if trade volumes slow, then India's exports growth and India's GDP is also likely to slow.
Speaker: In fact, we're already seeing some of the export volumes beginning to slow since August.
Speaker: That's one thing that could soften growth.
Speaker: The other thing that could soften growth is just pent up services demand ending.
Speaker: At some point, it comes to an end.
Speaker: This time in particular, it's been cut short by high prices, high inflation.
Speaker: So I think the combination of slower exports and slightly weaker private consumption will mean softer GDP growth in the next couple of quarters.
Speaker: And how exposed is India to rising US interest rates?
Speaker: We've seen the currency weaken, of course, on the back of this.
Speaker: Is that something that really is a major drag on the Indian economy or is it really more domestically driven and it matters what happens to local inflation and local interest rates?
Speaker: Yeah, what the Fed does definitely matters.
Speaker: But I would argue here that what's happening domestically matters more.
Speaker: And I think one thing to look out for is inflation.
Speaker: Inflation has been running higher than the RBI's 4% target and even higher than the RBI's upper bound of 6% for several months now.
Speaker: And the RBI has had to raise rates for simply bringing down inflation.
Speaker: So I think that's been a larger driver of India's rate policy in the last couple of months.
Speaker: Now, the other external angle, of course, is energy, right?
Speaker: India is a huge net energy importer.
Speaker: We've seen big disruptions to global energy markets over the past year.
Speaker: How disruptive has that proven for the Indian economy?
Speaker: And are you worried about energy prices going forward?
Speaker: Yeah, so look, India is a huge importer of oil.
Speaker: And with oil prices having risen so much, India's trade deficit has widened.
Speaker: In fact, I would say that today, the current account deficit is twice as high as it should be.
Speaker: And I think that is generally a problem.
Speaker: So yes, rising commodity prices globally have created a problem for India.
Speaker: But having said that, India is also trying to do a lot of things to increase renewable energy, to reduce its dependence on imports.
Speaker: There have been a lot of ambitious targets.
Speaker: renewable energy, which India has been able to meet over the last couple of years.
Speaker: So, Pranjit, what are some of the key initiatives that you're tracking at the moment when it comes to alternative energy build out in India?
Speaker: There's a lot going on on that front.
Speaker: India had many targets on renewable energy in terms of installed capacity, and it's actually met many of these targets even before time, and that has been very impressive.
Speaker: Many corporates, private sector corporates are working on futuristic sectors like green hydrogen.
Speaker: There are ambitions that India becomes a green hydrogen hub in the region.
Speaker: And then, of course, there are a lot of government subsidies on sectors such as EVs and solar panels.
Speaker: So a lot of excitement and a lot of activity is happening on the green transition for India.
Speaker: Thank you, Pranjul.
Speaker: This is probably a good point to take a quick break.
Speaker: And when we come back, we'll talk about the medium-term outlook for the Indian economy and some of the structural growth drivers that will hopefully help raise India's growth over time.
Speaker: Pranjal, we've talked about the near-term outlook, some of the challenges, external and internal, for the Indian economy, but let's focus more on the medium term.
Speaker: How optimistic are you about India's growth rate?
Speaker: We kind of noted at the beginning that, on average, the Indian economy has grown by 6% over the past decade.
Speaker: Is that a number that you think is sustainable going forward?
Speaker: Yes, I think there are a lot of new growth drivers that have emerged over the pandemic period.
Speaker: And it makes me very excited about India's medium term growth potential.
Speaker: One of them is the rise of high tech goods and services exports from India.
Speaker: Now, we all know the story of IT services exports, which is expanding now.
Speaker: But there's also a lot of excitement in high-tech goods exports, for instance, mobile handsets, drugs and pharmaceuticals, automobile parts, specialized machinery.
Speaker: And let me tell you that in each of these sectors, India has actually been gaining global market share since 2017.
Speaker: So that is one sector which I'm excited about that I think can propel growth higher over the next decade.
Speaker: And how would that play out domestically?
Speaker: You talked about high tech exports of goods and services, but how does it really impact the domestic economy?
Speaker: Is there a productivity gain?
Speaker: Are there startups?
Speaker: Is there kind of a rewiring of the economy domestically as well?
Speaker: Yeah.
Speaker: So look, another new sector of growth is the startup ecosystem, which is based on India's quite impressive public digital infrastructure.
Speaker: Now, there are many startups that are sprouting, you know, based on India's young demographics, a very digitally savvy population.
Speaker: These startups are now taking up bigger and bigger challenges to provide answers to many real economy problems, ranging from the services sector to manufacturing, digitization of manufacturing, and even agriculture, for instance, digitization of ag tech.
Speaker: So a lot of exciting startups are happening and our sense is,
Speaker: that these can really change a lot of the domestic ecosystem, give rise to new jobs, to futuristic capex, and basically higher GDP growth over the next decade.
Speaker: So the way you describe this is really an economy that's coming into its own, obviously, tremendous human talent in India, technologically very savvy.
Speaker: But in the past, India has also been held back by sort of lack of infrastructure, for example.
Speaker: So the potential was always there, but some of the hard infrastructure, for example, was lacking.
Speaker: Do you see that changing going forward?
Speaker: Is there a lot happening on the ground to kind of
Speaker: build the underlying infrastructure to allow kind of the improve the ecosystem for some of this this tech revolution that you're talking about to to to thrive?
Speaker: Yeah.
Speaker: So on the one hand, you know, many of these digital startups are providing digital solutions to physical problems.
Speaker: For example, think about e-commerce.
Speaker: You know, the goods and services are brought to your doorstep if the infrastructure is not good enough for you to go and access the goods and service yourself.
Speaker: So in a way, you know, digital solutions are making up for some of the physical deficiencies in the economy.
Speaker: But having said that, it's also important to get a lot of the reforms going.
Speaker: And my sense is that India has been reforming quite a bit over the last decade.
Speaker: As in, you know, there's been the GST, goods and services tax reform.
Speaker: There's been the insolvency and bankruptcy code reform.
Speaker: There has been a reform to clean up the real estate sector.
Speaker: The entire public digital infrastructure has stood up in the last five to 10 years.
Speaker: The government, interestingly, is spending a lot more on infrastructure investment now than it was a decade ago.
Speaker: And balance sheets of corporates and banks are in a much stronger position now than they were a decade back.
Speaker: So I think a lot of reforms are also happening alongside the emergence of the new sectors that I spoke about.
Speaker: And all of this together makes me excited about India's medium-term growth potential.
Speaker: So a lot of it is technologically driven.
Speaker: You mentioned alternative energy, you mentioned startups, you mentioned digital solutions to potential infrastructure bottlenecks, which would all help increase growth.
Speaker: But from a global perspective, there's always been this suggestion that maybe India could step up its role in global supply chains.
Speaker: We've certainly seen a large rise in foreign direct investment.
Speaker: How much do you think India can actually replicate some of the model we've seen elsewhere in Asia where it integrates itself more closely into global manufacturing supply chains?
Speaker: Do you see any evidence of that coming through?
Speaker: Yeah, I think where India's growth trajectory has differed from many other emerging countries is that it has gone on to services much faster than others.
Speaker: As in today, I would say that the growth in its services exports, services as a share of India's GDP is much higher compared to many other emerging markets.
Speaker: So services has been a much bigger driver of growth than manufacturing.
Speaker: And I think some of that will continue over the next decade.
Speaker: But having said that, I also think that manufacturing sector is rising.
Speaker: You know, firstly, there are many digital solutions to physical infrastructure problems that we face, you know, digitization of manufacturing, better access to credit, better access to final markets with e-commerce.
Speaker: But also there are, you know, a lot of reforms that I mentioned, which are helping, you know, manufacturing grow.
Speaker: We've seen India gain global market share in some specialized high-tech goods.
Speaker: It has a long way to go, but I think the first steps have been taken.
Speaker: So, Pranjal, you really describe another very resilient economic story in Asia.
Speaker: It's the fifth largest economy now in the world.
Speaker: It's driven by technological revolution.
Speaker: It's driven by supply chain integration.
Speaker: It's driven by digital solution, alternative energy, and even a consumer market.
Speaker: So where do you then put the trend growth rate over the coming year?
Speaker: We mentioned 6% on average over the past decade.
Speaker: Where would you put it going forward?
Speaker: Yeah, so look, on the eve of the pandemic, it was a 6% growth economy.
Speaker: My sense is that some of the new sectors like high-tech exports and the startups ecosystem can raise India's GDP growth easily to about 6.5%.
Speaker: And if these startups become more ambitious and they not only focus on services sector, but also get into manufacturing and agriculture and the government doubles up on reforms, then my sense is that over the next decade, India can even see 8% GDP growth.
Speaker: Well, that's a perfect note to end on, Pranjul.
Speaker: 8% growth is the target, the magic number 8 for India.
Speaker: It is perhaps within reach in the next few years due to the factors that you describe.
Speaker: And I think a great reminder in the world where we have tremendous turbulence at the moment with energy market disruptions and rising interest rates and slowing trade.
Speaker: that there are really strong, solid, structural stories here.
Speaker: And India certainly is a prime example.
Speaker: So thank you, Pranjal, for coming on to the show.
Speaker: Great to be here, Fred.
Speaker: And that's it for another week, folks.
Speaker: Always a pleasure to have you with us here under the Banyan Tree.
Speaker: We'll be back again next week, putting Asian markets and economics in context.
Speaker: Till then, take care and all the best.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
