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Under the Banyan Tree - India: Energy, El Niño and economic growth
456 Plays4 days ago
Fred is joined by Chief India Economist Pranjul Bhandari for a wide-ranging look at the various forces shaping India's economic outlook.
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Transcript
Introduction to the Podcast and Hosts
00:00:00
Speaker
AI trade deals, oil and a heat wave. There is a lot that could shape the Indian economy in 2026 and beyond. Let's dive into it right here under the Banyan tree.
00:00:20
Speaker
Welcome to Under the Banyan Tree. I'm Fred Newman, Chief Asia Economist here at HSBC in Hong Kong. And Under the Banyan Tree, we of course put Asian markets and economics in context. Now, this week we want to talk about the Indian economy as has been in the headline because we saw financial markets. They are coming a bit under pressure in the last few months. On the other hand, economic data seems to be holding up. But of course, India is always an economy that provides plenty of interesting narratives and nuances for us to discuss. Now to join me to delve into all things India is Chief India and Indonesia economist Pranjul Bhandari based in Singapore. So welcome to the podcast Pranjul. Great to be here, fair as always. Now um let's start with first, um yeah where is the economy going?
Impact of Energy Shock on India
00:01:11
Speaker
Now we have this enormous energy shock and traditionally when we think about the Indian economy it's a huge oil importer Whenever in the past oil prices went up, that immediately meant slower growth in India, higher inflation, and India always struggled a little bit. how What have you seen in this current energy shock? How have things been in India in the last few months in terms of economic activity and and inflation?
00:01:35
Speaker
Yeah, thank you, Fred. So interestingly and ironically, growth has held up pretty well in the last couple of months in India. ah You know, when we sort of investigate, we find that many companies are front front-loading manufacturing activity. So, you know, the the thinking is that we have access to natural gas, we have access to crude oil, let's produce and keep and let's store things. What if we run out of supplies later on? So we're seeing a lot of front loading of manufacturing. And, you know, when i look at some of my data, stock of finished goods are the highest in a decade. Job growth is actually rising because many of these companies are hiring right now. So ironically, in the first few months, it seems that growth continues to be pretty strong.
Economic Challenges: Energy and El Nino Effects
00:02:18
Speaker
That's interesting. So you're saying because companies are so worried that there might be more shortages coming, they actually accelerated production to quickly finish goods and not to be caught short with supply chain challenges. But then ultimately, though, India does import an olive oil. Does that mean we're just storing up maybe challenges for later on in the second half of the year once the the restocking, the the inventory buildup starts to fade and once really the energy – constraints start to bite because it will run out of reserves, for example. Are you worried about this ultimately impacting then growth later on?
00:02:53
Speaker
I am. Particularly in the second half of the year, my sense is that things will soften if companies have overproduced now, you know, they will stop producing or they'll slow their production later on. And my worry is that this is not just an energy shock.
00:03:07
Speaker
I'm worried that we'll have an El Nino, which might set in soon in a couple of months. And that could have its own challenges because, you know, India has a very large agricultural sector.
00:03:18
Speaker
And if you have El Nino, it means ah very warm temperatures, heat waves, which can create havoc for the agricultural sector. So to towards the second half of the year, you're going to see the impact of both the energy shock and the El Nino shock.
00:03:31
Speaker
So two shocks coming together, energy and another heat wave potentially and of course India is still a very rural economy so a heat wave would matter for the incomes for a lot of Indians and then maybe not just impact agricultural production but also the consumption of people who live in our rural areas and and so that might come together. But there's also been this issue of fertilizer. We read a lot about the disruption from Middle East impacting the supply of fertilizer. So you have the El Nino shock that m impacts agriculture. you also worried about sort of the high fertilizer prices and the lack of availability also weighing on on the next harvest and that that might then pressure incomes and inflation?
00:04:13
Speaker
Yeah, absolutely. So that's the other thing that could show up in the second half of the year. It's not shown up yet because India did have a lot of reserves and stocks it could use for a few months. But my sense is that once we get to the fourth quarter of the year, you know, around October, November, December, then the shortages of fertilizer or higher fertilizer prices could start hurting. So, you know, again, we have a lot of things coming together in the second half of the year, the energy shock, fertilizer and the El Nino.
00:04:41
Speaker
That's interesting. So you're saying on the one hand, yes, actually numbers have been very good up until now, but there's a risk of a slowdown because of all these factors we mentioned coming together.
India's Growth Potential and Strategic Positioning
00:04:50
Speaker
Now, if I look at financial markets, for example, the currency has become under pressure. We see pressure even relative basis, the equity market hasn't performed that well.
00:05:00
Speaker
Is that that investors are discounting the better numbers now and worried like you about what may come? Or is there something else that's really weighing on the currency and maybe financial market sentiment?
00:05:12
Speaker
Yeah, taking a step back, I can see that it's over the last year that across asset classes, equities, rates and FX, India has underperformed the rest of emerging markets. And and my sense is that what's at the heart of this is really the growth story around India.
00:05:29
Speaker
I think there are two very big themes, growth themes that are on the world right now. One is China plus one and the other is AI. And there has been a sense over the last year or so that India hasn't really been a prime beneficiary of either. And I think this is weighing on returns across all asset classes in India.
00:05:48
Speaker
That's interesting. So you highlight two kind of more structural concerns. So it's not that investors looking too much at the oil and what may come on El Nino, but really there's been a question mark or sustainability of growth. Now, I want to dig a little bit deeper into that. You mentioned China plus one. what what What do you have in mind with that? That's the shift of manufacturing out of China.
00:06:08
Speaker
into other countries. India was billed as potentially beneficiary of that. i think Apple has you know moved some of its iPhone production to India, for example. I think close to 18, 20% of global iPhones are now actually manufactured in India. Is that the 200 plus one and and and why is that being questioned at the moment?
00:06:26
Speaker
Yeah, so you know right after the pandemic was over, India saw a huge inflow of FDI. And you know all the things that you're talking about, you know Apple and and many other MNCs were putting up manufacturing in India. And the sense was that manufacturing in India will take off. But as as the years passed, a lot of this FDI actually began to slow. And it seemed like that this FDI was going to other parts of Asia and not really to India. And India wasn't a prime beneficiary of the entire China plus one thing. And I think that sort of weighed read on sentiments. So if I was to just mention one data point, it is FDI into India. When I look at FDI data, it has slowed ah quite a lot. A lot of people, you know, they say that, no, it's not inflows. That's the problem.
00:07:08
Speaker
It's FDI outflows. It doesn't matter. the net FDI number into India has slowed over the last couple of years, and I think investors have tracked that. That's interesting. so So a bit of a question mark over the manufacturing export story in India. But then, yeah know, over the last five, six years at least, there's been this very positive sentiment around it services exports in India, India being very strong when it comes to IT services. um But here's where the AI story comes in a little bit, booming globally and India is very much tied into IT services.
00:07:43
Speaker
Is AI a headwind for the Indian economy or a tailwind? I mean where do you come down on in terms of what AI means for growth in India business opportunities?
00:07:54
Speaker
Yeah, so far, I think the prime beneficiaries of AI have been either those who are the writers of the large language models or those who produce the hardware that's needed for the AI to rise. And in a way, India hasn't been a part of either. biggergger And that that's sort of been a disappointment over the last year. But if your question is, how is India going to fare over the medium term, the next couple of years? I think it's still up in the air. When I look at India's IT exports, it's got two parts. One of the large IT companies who actually provide a lot of softwares and their plan is that they're going to rebuild themselves and they're going to reimagine their work and they're going to use a large line language models and and continue to you know write softwares and and help MNCs who were their own own old clients. But we'd have to see how that goes.
00:08:39
Speaker
But there's this other part of India's ID exports, which is what we call the global capability centers, which is a lot of manufacturing MNCs around the world who actually set up, you know what you call the back office in India and have been doing more and more work from the Indian back office. Now, that format is doing really well. It continues to grow very strongly. And my sense is that part will continue to rise well. But the other part will have to really reimagine itself.
00:09:08
Speaker
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00:09:21
Speaker
Now back to today's episode.
Optimism and Future Prospects for India
00:09:27
Speaker
So we talked a lot about the challenges. We have the oil at the moment. We have the potential of a decline in the inventory cycle in the second half of the year. We have El Nino with a higher temperature. It's particularly important for South Asia and India in particular.
00:09:43
Speaker
What makes you though, let's say, on a more positive side? What would you say that investors or anybody is really missing? you know What are some of the key strengths that you would say, hey, don't just be too pessimistic. India still has a few aces up its sleeve.
00:09:57
Speaker
But I'm glad you asked that because all this while we were discussing, you know, what happened yesterday and what's happening today. But I think there's a lot of excitement for the future. and I'll tell you what makes me excited.
00:10:08
Speaker
i'm I'm noticing that India is integrating a lot more with global trade than it has over the last 20 to 30 years. In the last six months, it has signed around six trade deals with U.S., EU and many more are going to come. It's been cutting down its own import tariffs. It has been opening up a lot more ah to FDI, particularly FDI from China, it's doing a lot of deregulation back home as well. Basically, you know, it is trying to reform and trying to get to, you know new manufacturing and new growth. And my sense is there will be a payoff. I think, you know, once the energy shock, the LNN shock is behind us, we should start seeing FDI flow into the economy. I'm particularly excited about the India-EU trade deal.
00:10:52
Speaker
It is not just about trade. It's also a lot about, you know, all kinds of strategic investment like energy security, about defense, about financial services. And I do think that FDI will start trickling into India. And India could rise as a manufacturer, something that it has not done over the last two decades.
00:11:10
Speaker
It's interesting. So I think what hear also a little bit here, and then correct me if I'm wrong, is that India tends to almost rally to the challenge sometimes. So when you have external pressures, I'm reminded, for example, remember in the early 1990s, India had a balance of payments challenges. There was support from the um IMF that came in, reforms were instituted. And that really... Then you know within that challenge, you kind of see reform suddenly come through. and And is this a similar period now where sort of India's leaders are looking at the world saying, oh, things are becoming more challenging, energy, tariffs in the U.S., et cetera. And we need to really double down our effort. And and that's ultimately the positive that you know the crisis here is a catalyst for the reforms that India needs.
00:11:57
Speaker
I think so. I think you're right, because ah if this was not the case, you know, Indian authorities would not have this big change in heart to really fast track a lot of the trade agreements, which were taking too long in the past to sign to open up more to FDI. So I do think a lot of reforms are happening. Of course, a lot more are needed, but I'm hopeful that in a year's time, all of this will start showing up as better growth.
00:12:22
Speaker
Pranjal, fantastic. We have um you know challenges in India, for sure. Second half of the year may be looking a bit more challenging, but we also have reason to hope that the reform process will gain traction and that actually India will continue to rise
Conclusion and Call to Action
00:12:36
Speaker
to the challenge. And of course, with 1.5 billion people, sky's the limit in terms of the potential if you manage to unleash that. So thank you very much for joining us, Pranjal, and see you next time. Thanks for having me.
00:12:51
Speaker
Well, that's it, folks. ah That was our conversation with Pranju Bhandari, HSBC's chief economist for India and Indonesia. If you like this podcast, please remember to listen, like and subscribe. We get fresh episodes coming every week to you under the Banyan Tree. Join us again next week and see you soon.