Three leading economists shared insightful perspectives on the Indian economy during the session I moderated at the Morningstar Investment Conference held in Mumbai on September 20 and 21.
They were unanimous about the fact that India has emerged as a very attractive investment destination, and a very stable economy in a very turbulent external environment.
There has been an improvement on the corporate balance sheet, the twin balance sheet, the quadruple balance sheet, financial sector balance sheet and India's own external balance sheet, which has helped to ensure that various financial metrics like interest rate, currency and equity markets are responding very differently in this global inflationary environment and the Fed tightening.
SAUGATA BHATTACHARYA: Executive Vice President and Chief Economist, Axis Bank
India has shown the world how resilient we have been post-pandemic. A lot of the credit needs goes to the government for the very restrained fiscal response to the pandemic; the stimulus programmes have gotten the large economies in trouble.
We have an inflation problem that needs to be managed. Having said that, the inflation dynamics across the three geographies - U.S., Europe, India - are very different from each other. In the U.S., it's not just a price inflation problem, but a wage inflation problem. We are much better off, and I think that is what is getting reflected in our attractiveness as an investment destination.
I don't think it is completely a monetary policy response that is going to tame down inflation. It has to be multiple dimensions of fiscal response, trade policy, even a diplomatic response using oil.
The currency is likely to be a problem and the exchange rate will need to be as much a part of the monetary policy response as interest rates.
The RBI will have to chart its own course. It is operating in this classic impossible trinity of open economy macroeconomics and will have to manage three or four different dimensions in doing this.
Read Saugata's detailed views in: How do we increase Per Capita GDP?
UPASANA CHACHRA: Executive Director and India Economist, Morgan Stanley
India's investment potential is definitely coming across if we look at it in terms of equity market outperformance, which it has consistently delivered, especially in this year in a very challenging external environment.
What makes this time different for India is that the starting point of the macro position has been much better than what we've seen in the similar episodes of changes and commodity prices or Fed tightening cycle. The macro balance sheet is definitely better.
India's growth fundamentals have definitely improved. We are seeing an improvement in the domestic demand-oriented indicators, which is providing some hope against the very weakening and increasingly challenging external environment. There is a change that has happened versus the last decade that we saw where growth was periodically interrupted by a series of exogenous shocks, and the outcome was that we had a very suboptimal sort of growth outcome.
Most of those shocks should be behind us and balance sheet positions are better. We are in an environment where globally there is a focus on supply chain diversification. India can be viewed much more favourably as an investment destination. So, a lot of factors are coming together.
There are definitely ponderables like commodity prices for example. But overall, India is a very stable and steady economy in a growing externally challenging environment.
Read Upasana's detailed views in: Why India is at an inflection point
PRANJUL BHANDARI: Chief India Economist, HSBC Securities & Capital Markets (India)
India's high skill exports are really taking off. India's start-ups are really taking off. At the first grade, they focused on things like e-commerce. But eventually, as they start taking up more challenges, for example, things like digitisation of manufacturing, that could have huge growth and jobs pay off. So, a lot of medium-term positives are there.
Exports have grown rapidly; a 20% growth between June 2019 and June 2022. It's been a huge driver of India's recovery. But now with global growth slowing, exports are also slowing.
Pent up services demand has been a huge driver of growth in the last couple of months. As restaurants, schools, shopping malls, all of this opened, urban jobs came back and the people who had moved back to their rural homes started to come back to the urban locals. And once they did that, their incomes go up. When a person moves from rural India to urban India, on average their income goes up 2.5 times and that created this extra demand and that created growth in the last couple of months. But this adjustment or readjustment is now ending.
Urban employment is back to pre-pandemic levels. So, we can't get extra growth from there right now.
Corporates have seen strong volume growth over the last couple of months. Margin growth hasn't been that great because they've had to deal with high input costs, they couldn't pass all of it on to final consumers. But if the entire migration story back from rural to urban is over, if the export is going to slow down a little bit, then will volume growth remain as strong as it was in the last few months?
Large firms have gotten larger through the pandemic. Hence, the government has earned a lot of tax revenues. And through that they were able to increase the subsidy bill and cut oil taxes. That has kept inflation lower than we've seen in the developed world.
It was not organic formalisation. It's not that small firms became big over time because of reforms. It was more of disruptive formalisation, forced formalisation. If the small firms come back, then these formalisation gains will fade away. If the small firms don't come back, then there will be a lot of growth problem because these small firms are labour intensive and then the government will have to do redistributive policy. We don't know how this formalisation is going to end.
All the activity indicators we track seem to be doing well, but there are many moving parts beneath the ground. All that I mentioned could make for some slowing of growth numbers in the next couple of months and we have to be ready for that.
Read Pranjul's detailed views in: A frank assessment of the Indian economy