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: Hello from Hong Kong and welcome to Under the Banyan Tree where we put Asian markets and economics in context.
Speaker: I am Harold van der Linde, Head of Asian Equity Strategy at HSBC.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: Today we're taking the pulse of growth in India, one of Asia's most rapidly growing economies.
Speaker: Our Chief India Economist, Pranjal Bhandari, has gone in-depth looking at 100 key growth indicators and mapping them to various sectors.
Speaker: Pranjul is our guest today on the show, and we're excited to hear about her findings.
Speaker: From HSBC Global Research, you're listening to Under the Banyan Tree.
Speaker: A little context on India before we start.
Speaker: We've seen very impressive GDP growth upwards of 7% in recent times and have also, of course, been very healthy gains in the equity market over the years.
Speaker: But things look like they're starting to cool a little and a lot of data points are giving us really a bit of a mixed message on the growth picture.
Speaker: On that note, Harold, let's bring in Pranjal for a clean read on the Indian economy.
Speaker: Well, Pranjul, thanks very much for coming on to the podcast.
Speaker: And I know you've crunched an enormous amount of data that give you kind of an idea what is going on with growth in India.
Speaker: We're going to dive into this a little bit, but can you give me just a first broad outline?
Speaker: What is the conclusions that you broadly have drawn?
Speaker: Yeah, thanks, Harold.
Speaker: So lots of questions these days on what's really going on in India.
Speaker: Is growth slowing?
Speaker: Is it going faster than before?
Speaker: Because we just have so much of data.
Speaker: All of them give us mixed messages.
Speaker: So we bought together 100 data points.
Speaker: And what we find is something very specific, which is that about 55% of the economy continues to grow at a positive clip, doing better than it was a quarter ago.
Speaker: which then means that 45% of the economy is not doing as well as it was doing a quarter ago.
Speaker: All of this is interesting because just a quarter back, 65% of the economy was doing very well.
Speaker: So this fall from 65 to 55 is something that's perhaps spooking markets a little bit.
Speaker: So on that note, Pranjul, let's dive a little bit deeper.
Speaker: Where do we see signs of slowing in India?
Speaker: Yeah, a couple of them.
Speaker: So look, I would say one is mining and utilities.
Speaker: It's very interesting that we had some adverse weather events a quarter ago.
Speaker: We had heat waves.
Speaker: Peak demand for power was very strong, but the weather has normalized.
Speaker: The peak demand is not there.
Speaker: So all of this mining and utility growth has actually fallen.
Speaker: So that's one part.
Speaker: But I think what's bigger than this is what's going on in consumer demand, that both in urban India and in rural India, consumer demand is coming off a little bit.
Speaker: And in fact, one indicator that we like to look at is the GST collections, the tax collections, which has a little part in it called CES, which is the money you get from high luxury items.
Speaker: That is what was really driving the GST growth.
Speaker: And that is the part that has slowed the most.
Speaker: So we're seeing a lot of the high end consumption, the luxury consumption actually coming off.
Speaker: Yeah, I'm wondering, Pranju, but we probably don't have any data on this, but the stock market in India has done just phenomenally well over the last couple of years.
Speaker: So a lot of people who would have played in the stock market have made some nice gains.
Speaker: I wonder in how far that then goes into luxury spending, if there's a bit of a wealth effect in India, or do you think that's too small still?
Speaker: Most people don't have enough exposure to equities.
Speaker: Well, look, you know, there was something which was like keeping consumption growth high.
Speaker: I think it was the combination of high credit growth, you know, high incomes in high tech sectors, and also, you know, wealth effects from very strong equity markets.
Speaker: And my sense is that all three parts have softened a little bit and that's something that's going to play and show up in the markets.
Speaker: And what about the positives, Pranjal?
Speaker: Where are we still seeing solid growth in India?
Speaker: Yeah, so there are actually three of them.
Speaker: One is agriculture, because the heatwaves are behind us.
Speaker: Agricultural growth has picked up.
Speaker: And my hope is that over time, we can start seeing that in rural demand.
Speaker: And then there's government spending, because we had elections earlier this year.
Speaker: They had slowed for some time, but they've picked up.
Speaker: In fact, both the central and state governments are doing a lot of capital expenditure, CapEx push as well.
Speaker: So we're seeing investment data, construction data as pretty strong.
Speaker: led to a large extent by government spending having picked up.
Speaker: And then there's exports, which I actually like the most because it's really a story of how the export basket has diversified in India.
Speaker: It's not just your goods exports.
Speaker: The October services trade surplus was the highest ever.
Speaker: These are the parts of the economy that are still doing very well.
Speaker: Just as a side question, there's been a lot of talk about investments and FDI coming into India.
Speaker: People want to reduce their reliance on, say, North Asia and mainland China.
Speaker: Is that a growth driver?
Speaker: Do we see massive FDI coming in?
Speaker: Or is that something we talk about and that just has to materialize yet?
Speaker: Or are they maybe already exporting?
Speaker: I don't know.
Speaker: Yeah, I think it's a little bit of the latter.
Speaker: You know, we see a very strong investment intentions out there.
Speaker: So people really want to come in India, particularly in high tech sectors, semiconductors, data centers, artificial intelligence, EV, solar panels.
Speaker: But when we look at the actual FDI numbers, it has been a tad disappointing.
Speaker: I don't think it's just India.
Speaker: I think when I look around the emerging markets, I think FDI inflows have slowed over the last year.
Speaker: Yeah, no, that's correct.
Speaker: So broadly speaking, sales for the air conditioning is slowing down a little bit.
Speaker: I'm making it very simplistic and luxury sales a bit as well.
Speaker: On the other hand, the government is spending a little bit more.
Speaker: Rural agriculture is doing a little bit better.
Speaker: That offsets that.
Speaker: So that's good.
Speaker: So what does this all mean for you as an economist if you look into 2025 and beyond?
Speaker: Yeah.
Speaker: So look, you know, my sense is that the strong growth we've seen in India for the last couple of years has come on the back of what I call new India.
Speaker: Lots of high tech sectors, you know, electronics, manufacturing, services, exports, digital public infrastructure on the back of which we've seen so many startups sprout in the economy.
Speaker: But my sense is that after a couple of years of very strong growth, it's normalizing a little bit.
Speaker: The base is also becoming high.
Speaker: It's hard to grow 30% year on year, you know, every single year, you know, what we've seen in professional services exports.
Speaker: What does this mean for growth?
Speaker: My sense is that, you know, growth is coming down from about 7% to around 6.5%.
Speaker: And this is that normalization, which I think is spooking a lot of people.
Speaker: But the six and a half percent number is still a very strong number.
Speaker: And if it comes on the back of agriculture, rural demand picking up, then it could actually mean growth becomes more broad based than it was in the last two years when it was quite concentrated on luxury goods and top of the pyramid.
Speaker: So I think I would call this more a normalization rather than a slowdown.
Speaker: Yeah, normalization sounds good in the sense that if you have very high growth, all sorts of excesses can build up, like inflation and these sort of things.
Speaker: And you want to avoid that as well, I guess.
Speaker: So that's a good thing.
Speaker: Now, I'd like to take a break now and come back after the break and see what this really means for markets and people that invest in India as well.
Speaker: So we're back with Pranjal Bhandari talking about growth in India.
Speaker: And I think the takeaway from part one was really that the picture is starting to normalize in the economy.
Speaker: Now, Pranjal, I know Harold is desperate to steer the conversation into equities as always.
Speaker: But before we let him do that, I want to ask you a quick question on the currency.
Speaker: When we look at the rupee, it's actually been trading quite a lot lower in recent weeks.
Speaker: It is quite a bit weaker in
Speaker: Is that just because of normalization that we're seeing or is there something else to it?
Speaker: Well, I think it's the external, it's the global backdrop, US elections, the dollar has been strong.
Speaker: We've also seen outflows from India's equity markets, 12 to $13 billion over the last two months.
Speaker: So I think all of that has weighed on the rupee.
Speaker: I think all of this has implications for monetary policy.
Speaker: You know, about a month ago, there were expectations that they may cut rates.
Speaker: But my sense is they'll find it hard to cut rates at a time when
Speaker: the exchange rate is volatile and at a time when inflation is pretty high.
Speaker: In fact, the latest inflation number showed that inflation is 6% plus, which is higher than where RBI would like it to be.
Speaker: A lot of it is because of food prices.
Speaker: And once food prices begin to fall, they actually fall very quickly, particularly vegetable prices.
Speaker: But until we don't see that happen, our sense is the RBI will not be cutting rates.
Speaker: So we expect no rate cuts in 2024.
Speaker: Hopefully in early 2025, we'll see one to two rate cuts.
Speaker: So Harold, you know, everybody's noticing that equity markets have begun to weaken a little bit in India.
Speaker: What's going on there?
Speaker: Well, Pranju, I think it was really interesting to listen to what you've been saying, because I think there's a couple of things that have impacted the equity market that are directly linked to what you said.
Speaker: But there's a couple of other things going on as well.
Speaker: So let me put this point wise together.
Speaker: You mentioned about moderation in growth.
Speaker: We've seen this in the equity market as well.
Speaker: Since the summer, the expectation was that, hey, maybe the high growth era is over.
Speaker: We're seeing a moderation in earnings growth as well.
Speaker: It's earnings growth, not economic growth.
Speaker: That's so important for equities.
Speaker: And that was not always driven by what you mentioned, but more by, for example, that the banks really had to compete to get the deposits in because everybody was taking money out and putting it into the stock market.
Speaker: So they raised their rates sometimes a little bit to make sure people wanted to keep the deposits in and that's bad for their margins.
Speaker: But some of the consumer stuff that you talked about, we've seen that also in the consumer sector coming through.
Speaker: So we see a moderation in growth, probably somewhat in line to what you talked about this as well.
Speaker: But there are also other factors.
Speaker: We see a stronger dollar.
Speaker: We see that interest in China has come back.
Speaker: So people have taken money out of India, it seems, and then said, OK, let's put this in China at work.
Speaker: I could book some nice profits in India and hopefully I can make some more profits of it in China.
Speaker: So there's a sort of rotation within the region going on as well.
Speaker: How far can this rotation continue?
Speaker: Actually, if we look at the funds, a lot of the Asian specialists, they've already made a large part of this sort of rotation.
Speaker: A lot of the global funds have not done so.
Speaker: So it could well be that we're already well into some sort of rotation in Asian equities.
Speaker: And this maybe can continue a little bit longer, but we're already moving into the second half of this game, if you want to put it like this.
Speaker: So keeping that all in mind, it was really interesting to read your report, Pranjo, with all the data that you've gone through over the last couple of weeks.
Speaker: It must have been a big job.
Speaker: Hopefully, we can invite you back soon on another podcast just to see what the update is.
Speaker: And as we go into 2025, if the growth is really moderating or if it's hanging a little bit higher or if it's actually slowing even further than what we anticipate at the moment.
Speaker: But for now, thanks for coming on to the podcast.
Speaker: And that's what we've got to sign off for another week, folks.
Speaker: Many thanks for joining us.
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