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.
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Speaker: The following podcast from HSBC Global Research was recorded for distribution on the 12th of October, 2023.
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Speaker: Hello everyone, welcome to The Macrobrief, our weekly podcast showcasing the work of our team here at HSBC Global Research.
Speaker: I'm Janet Henry, Global Chief Economist, your host this week.
Speaker: Today I'll be speaking with Pranjal Bhandari.
Speaker: Pranjal is our Chief Economist for India and Indonesia, two countries where demographics will be key in determining economic growth.
Speaker: India is the world's most populous economy.
Speaker: It also has the world's largest youth population, with over 250 million people under the age of 25.
Speaker: And Indonesia is set to have the fourth biggest consumer population on the planet by 2030.
Speaker: So two economies where there are huge opportunities, but also large potential challenges ahead.
Speaker: And that's where I'd like to start with Pranjal, who joins me here in London.
Speaker: First of all, welcome to London.
Speaker: Thanks, Janet.
Speaker: Great to be here.
Speaker: Well, great to have you.
Speaker: So looking at India, obviously, I speak to different investors all over the world.
Speaker: And I think it's fair to say at the moment, there is an overwhelming optimism on the future of India's economy.
Speaker: Now, we've known over the years that India has a comparative advantage in services.
Speaker: Is that really still the main driving force that India offers the world?
Speaker: I think so, Janet.
Speaker: I think modern services in India are growing very rapidly.
Speaker: Look at India's IT services exports.
Speaker: It's no longer the call center of the 90s.
Speaker: It's not even the software solution provider of the early 2000s.
Speaker: It's now selling a host of professional services from legal, accounting, HR, design, R&D, etc.
Speaker: In fact, you know, about 1600 multinational companies have set up their global capability center, their services center in India and are producing a lot of, you know, firm-wide services in India and selling it abroad.
Speaker: And all of this is growing very rapidly.
Speaker: In the last three years, India has been earning about $60 billion a year more in revenue from selling these services than it ever has in the past.
Speaker: And obviously, you've written about this in a lot of reports, and I'm thinking of India's digital date, and more importantly, I suppose, leap in services, in which, you know, it's interesting, you're talking about the ways in which the service sector can actually spill over into manufacturing, whereas we think of other economies in the world where a manufacturing economy has gradually evolved into services.
Speaker: So perhaps you could give us a bit more detail on that.
Speaker: Yes, for sure.
Speaker: You know, in many countries we've seen economies rise from agriculture to industry and then to services.
Speaker: India sort of leaped from agriculture to services very quickly.
Speaker: But we are now seeing, you know, for instance, many of these MNCs who have set up their global capability service center in India and had a good experience are trying to set up their first manufacturing plant in India.
Speaker: You know, we are seeing this in sectors like medical equipment, high precision manufacturing, electronics, a move from services to manufacturing.
Speaker: By the way, we are also seeing that in India's domestic startups.
Speaker: Many of these startups, for example, India's own Uber, are now setting up their manufacturing arm, for example, producing many of these cars, which they were earlier only doing the services in.
Speaker: So there's a big move moving back from services to manufacturing.
Speaker: And how important is that in terms of driving future employment?
Speaker: Obviously, in my opening remarks, I mentioned the tremendous opportunities offered by a country that has strong population growth, especially a young population growth.
Speaker: But is that also a challenge in terms of providing jobs for these people?
Speaker: Yes, I worry it is the biggest challenge for the next decade, as in the part of India that's doing very well is what I call New India.
Speaker: You know, all the high tech things, high tech goods and services, domestic and exportable.
Speaker: But the problem is that New India only makes up 15% of GDP and employs just 5% of India's population.
Speaker: So there has to be a way in which old India joins into the growth story as well.
Speaker: And I do think that the pathways for that are becoming possible with things like digitization of manufacturing, with things like agri-tech, some of the old India is also getting energized.
Speaker: And if that happens, growth could be even higher and more jobs intensive.
Speaker: So, Prangile, let's turn to the nearer term and the cyclical side of the economy.
Speaker: When we look globally at the moment, the challenges hanging over large numbers of emerging economies are really growing.
Speaker: The dollar has been very strong.
Speaker: U.S. yields have been rising.
Speaker: The Fed certainly is telling us it's not going to be cutting interest rates.
Speaker: anytime soon.
Speaker: India has been outperforming.
Speaker: Growth has been very strong in the first half of the year, but India too is an emerging economy.
Speaker: So how long can it continue to grow so robustly or will India too also feel some of those strains that are being exerted on other emerging economies?
Speaker: Yes, Janet, it feels a lot like 2022, right, with a stronger dollar, higher U.S. yields, high oil prices.
Speaker: And this time around, we also have the El Nino, the weather event that's making rains very volatile and which could have large growth implications for an economy which has a large rural sector.
Speaker: But what we found is that growth so far hasn't really taken a hit.
Speaker: You know, we find urban growth, for instance, extremely strong.
Speaker: The job market is very hot.
Speaker: We find employment numbers to be even higher than what we had seen at the pre-pandemic period.
Speaker: So generally, incomes are strong as well.
Speaker: So even if rural incomes are a bit weaker than before, we think strong urban India is more than offsetting that.
Speaker: Also, you know, oil prices have risen over the last two months, but on a year-on-year basis, they are still lower than what they were last year.
Speaker: So that's also a continuation of positive terms of trade on the oil front.
Speaker: I think the one problem is India's external finances with oil prices tending higher.
Speaker: With India banning rice exports recently, the current account deficit has widened.
Speaker: We're also seeing a lot of the inflows into the equity markets and the debt markets slow a little bit.
Speaker: And my sense is that external finances will weaken a little bit going forward.
Speaker: Thankfully, India has a large stock of FX reserves and the RBI is quite active.
Speaker: And the rupee on the whole has been quite a stable currency in the region.
Speaker: So few concerns in the way of macroeconomic stability.
Speaker: Can we turn to Indonesia, another exciting and very populous economy within the region?
Speaker: Obviously, you cover both.
Speaker: So what are the similarities or indeed differences between those two very important economies?
Speaker: Yes, I think these are two economies in which the growth in the next decade could actually be higher than growth in the previous decade.
Speaker: The reason being, they have some new promising sectors.
Speaker: We already spoke about India's high-tech services sector, manufacturing sector, but Indonesia has some promising sectors too.
Speaker: For instance, it's moving up the value chain of manufacturing from just being an exporter of ores to
Speaker: to actually processing metals and becoming an exporter of processed metals.
Speaker: It's also moving up in the EV ecosystem using the large stock of nickel it has to make nickel batteries and then EVs.
Speaker: So lots of promising sectors out there.
Speaker: Our sense is that Indonesia's potential growth could rise by about 50 basis points in the next couple of years.
Speaker: And by the end of the decade, Indonesia's GDP growth could be close to 5.8% compared to 5.3% right now.
Speaker: Well, that's exciting.
Speaker: And again, cyclically in Indonesia, again, a comparison with India.
Speaker: How are they faring in a world where inflation has been high and quite sticky?
Speaker: Do you think that either economy faces some ongoing inflation risks or do you think actually we've seen the peak in interest rates in these economies and that we can actually look forward to some kind of easing?
Speaker: My sense is growth in India has been stronger than growth in Indonesia because especially, you know, India has this large services sector while Indonesia is more focused on goods trade.
Speaker: And at a time when the global economy is more services driven, India has done a bit better than Indonesia.
Speaker: So I think that sort of is one difference.
Speaker: But in terms of macro stability, Indonesia is extremely strong.
Speaker: Inflation has been very low.
Speaker: The fiscal deficit has been lower than targeted.
Speaker: Their current account, their external finances are worsening a little bit because they sell a lot of coal and palm oil and the prices of that have been falling.
Speaker: But generally, you know, it's an economy in which macro stability is quite strong.
Speaker: Our sense is that rates have peaked in both the economies and, you know, hopefully by the middle of next year, both will begin to cut.
Speaker: Our sense is Indonesia has more room to cut because inflation is just so well behaved there.
Speaker: Thank you.
Speaker: And the final but very important question is political.
Speaker: 2024, obviously a key year for elections globally.
Speaker: We'll obviously have the US election amongst many others, but both India and Indonesia will go to the polls in 2024.
Speaker: Pretty important.
Speaker: So can you give us your thoughts on why they are so important and anything you can tell us
Speaker: about the possible evolution of policy as a consequence of those elections?
Speaker: Yeah, both India and Indonesia have had strong leaders over the last 10 years.
Speaker: In Indonesia, President Djokovic has finished his two terms and there is a two-term limit, so he can't stand for elections again.
Speaker: And that's why the national elections on 14th February are actually very important.
Speaker: Will the new president continue the policies and reforms that President Djokovic had started?
Speaker: I think that's the key question right now.
Speaker: As of now, there are three key candidates out there.
Speaker: And when we go through, you know, everything they've been seeing, our senses that they imply the same thing for policy.
Speaker: So hopefully, you know, there will be policy continuity in the economy.
Speaker: As for India, Prime Minister Modi has also finished two terms.
Speaker: He's going to be up for his third term next year.
Speaker: And again, the big question is that will policy reforms continue in the same fast pace as we've been seeing in the last 10 years, because that is a very important part of India's growth prospects.
Speaker: Pranjal, thank you very much for joining us.
Speaker: Thanks for having me, Janet.
Speaker: And a special thanks to Janet for hosting this week's Macro Brief with Crane Jewell.
Speaker: In case you are new to the Macro Brief podcast, it's one of three podcasts we produce here at HSBC Global Research, all of which you are free to subscribe to on a podcast platform of your choice, including Spotify and Apple.
Speaker: In addition to the Macro Brief every week, our Asian edition under the Banyan Tree is hosted by Chief Asian Economist Fred Newman and Head of Asia Equity Strategy, Harold van der Linde.
Speaker: And don't miss our latest edition of the ESG Brief, diving into the world of retail returnables and the vexing problem of clothing returns that are ending up in landfills or incinerators.
Speaker: One event not to miss in the coming week, our regular Macro Brief host, Piers Butler, will be hosting a special live insights event on LinkedIn on Tuesday, the 17th of October, all about digital finance with Kalish Mistry.
Speaker: Kalish is our global head of insurance and digital finance equity research.
Speaker: That's the 17th, Tuesday at 10.30 UK time, 9.30 GMT,
Speaker: or 1730 Hong Kong time.
Speaker: Now to register, just email us at askresearch at hsbc.com.
Speaker: That is all for the macro brief for this week.
Speaker: Thanks very much for listening, and we'll be back next week.
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Speaker: We hope you enjoyed the discussion.
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