Intro: This week on Socio Economic Voices we have Rajani Sinha, Chief Economist, CareEdge Group, who shares some critical aspects of the Indian economy, its strength as well its scopes with Senior Journalist Mahima Sharma. Talking to her, Ms. Sinha is of the opinion that deeper economic co-operation with identified economies will help India further embrace globalization, even while remaining cautious about protecting its domestic interests. She asserts that amid global turbulence, a healthy balance sheet for corporates and banks, ample forex reserves, and a relatively lower external debt to GDP ratio are the current strengths of the Indian economy. Also, she adds that the cooling of global commodity prices will, to some extent, offset the adverse impact of a weak rupee on domestic inflation. How will this happen and when? To know this and more take a read…

MS: Changing Geopolitical Dynamics: An Opportunity for EU-India and other Nations'Cooperation and Collaboration Which could be the global nations that India must look at for the same, and why?

RS: With the pandemic and the Russia-Ukraine war, the global supply chain got disrupted. Economies felt the need for reducing their reliance on one particular economy. Therein started the strategy of diversifying exposure as opposed to overt exposure to one particular nation.

The EU specifically has large exposure to China in terms of trade and investment. Hence, they would look at diversifying their exposure, and this is where India has the opportunity to provide an attractive alternative. There is scope for EU-India cooperation in the areas of finance, commerce and talent.

Apart from the EU, India is also pursuing talks for a trade agreement with other nations like the UK, Canada and GCC. These agreements, once concluded, will not only provide export markets to India and enable the diversification of supply chains but will also enable India to aptly utilize its growing talent pool.

MS: What could be the impact of Rishi Sunak becoming Britain's PM and FTAs with India? Your analysis.

RS: The FTA with the UK is likely to get delayed due to a change in leadership. There are some contentious issues that will take time to resolve. The global economy, including the UK and India, are going through tough times post the pandemic and both will try to get the best out of this agreement in these tough times. The geo-political landscape has undergone some changes in the last few years. Economies are looking at reducing their reliance on a particular economy and looking at diversifying their supply chains. The other significant development was the Bre-exit, which will result in EU trade with the UK reducing because of new trade barriers. Also now the EU will be competing with the UK for many markets. Given the changed dynamics, both the nations have to do the tough balancing act of making the most of this opportunity even while ensuring their interests are safeguarded.

MS: In your view, how much will the US recession, the Ukraine war and the EU-UK uncertainty further hit India? How can India emerge stronger amid such threats?

RS: Exports contribute around 20% to India’s GDP, and hence we will feel the pinch of the global slowdown. India’s export data is already reflecting the pain of lower external demand. The other big concern is the volatility in commodity prices due to supply chain disruptions caused by the war and the pandemic. While commodity prices have fallen in the last few months, some supply bottlenecks still exist. Global high inflation and tightening of liquidity are being emulated in India, though the scale is different. There are also external sector threats in the form of a widening trade deficit, FPI outflows, falling forex reserves, and a sharp weakening of the INR in line with other emerging market currencies.

The turbulence in the global market in the last few years also presents opportunities to India. Post the pandemic, economies are looking at reducing their exposure to China. India, with its large market and talent pool, should take advantage of this opportunity.

With schemes like PLI, India is making an attempt to bolster its position in the global manufacturing arena. At the same time, in sectors in which India already has a competitive advantage, we should look at moving up the value chain to enable higher growth.

With the changed geopolitical landscape, India needs to forge new relations and deepen existing ones. Deeper economic co-operation with identified economies will help India further embrace globalization, even while remaining cautious on protecting its domestic interests.

MS: Coming on to the national factors, what's your analysis of the future of the real estate sector in India after the pandemic phase? And what advice would you like to extend to the common man regarding investments in the same?

RS: Post the pandemic, the residential real estate sector has seen a strong bounce back as people felt the need for bigger and better houses. Even with interest rates rising in the last few months, the demand momentum has been sustained as developers continue to lure with attractive offers. Moreover, even with demand rising rapidly, we did not see housing prices increasing sharply in India, as was the case in many other countries. Going forward, the potential for the real estate sector is huge in India, specially for the 'Affordable Housing' segment that has large latent demand. The potential for the office segment in the real estate sector is also huge, given the relatively lower rentals and talent pool advantage that India enjoys. Warehousing is another segment that is small currently but has scope of sharp growth in line with the sharp growth expected for the e-commerce sector.

Investment in the real estate sector should be made with clarity, whether it is for end-use or for price appreciation. In this upturn, the demand momentum is being led mainly by end users, while speculators are missing from the market. While making the investment decision, the common man should also take into account that the rental yields in the Indian market are low.

MS: In one of your recent news articles you assert: 'India gets hit by a global slowdown, and the linkages are only getting stronger. However, this time some macro factors favor India.' Can you please break this down for the understanding of our student audiences as well?

RS: There is no denying that India is linked to the global economy through various channels and hence cannot remain unscathed from the global turmoil. However, unlike previous crisis scenarios, this time around there are some macro factors in favor of the Indian economy and that has been providing optimism on the ability to weather this global storm.

With deleveraging over the last few years, the balance sheets of corporates are in a healthy condition. The median gearing ratio (total Debt/ Equity) for the top 1000 companies as per market capitalization has reduced to 0.29 in FY22 from as high as 0.65 in FY13. Our credit ratio (number of upgrades/ number of downgrades) has improved to an all-time high of 3.74 in H1 FY23 as against 1.48 in the pre-pandemic period of H2 FY19.

The banking sector is in good health, with the gross NPA ratio having fallen to 5.8% from a high of 11.5% in FY18. The strong fundamentals of the corporate and banking sectors are definitely providing resilience to the Indian economy in the midst of the global turmoil.

The other supporting factor has been the strong forex reserves of more than US$ 640 billion that India had built up by the end of 2021. This has helped India withstand the sharp deterioration in forex reserves as witnessed by other emerging economies too in the last few months. Having said that, India will feel the pinch of slowing external demand. Exports that contribute 20% to India’s GDP are already feeling the pinch. Moreover, India will also feel the pain of tighter liquidity and rising interest rates globally.

MS: Amid the fiscal deficit, what kind of investment or other push is needed to pull back the Indian economy, amid the global recession? Please give a detailed answer backed by statistics if possible.

RS: The investment push can be a strong force that helps the Indian economy move to a higher and more sustained growth trajectory. The central government has aptly identified investment as the growth engine and budgeted a strong capex of Rs 7.5 lakh crore for FY 23 (25% y-o-y growth).

In the first half of the year, the Central Government has achieved 46% of the budgeted target. Infrastructure intensive sectors like roads and railways accounted for a major part of the centre's capex. On the other hand, the state governments have been slow in their capex. As per our analysis, in the first half of the year, aggregate capex for 21 states fell by 1.5% compared to the previous year.

As far as the private sector is concerned, the ground is set for a pick up in the capex cycle. Corporate deleveraging in the last few years and increased capacity utilization levels in the manufacturing sector are likely to boost private capex in the next few quarters. However, the uncertain economic environment could be keeping some of the private investors wary. Our analysis based on data for 659 listed non-finance companies shows that capital expenditure by companies grew by 22% in FY22, following a decline in FY21. However, it remained below pre-pandemic levels seen in FY19 and FY20 for businesses. The capex by the private sector so far remains limited to few sectors and few big players.

MS: India's industrial production is shrinking; SMEs need a boost too. Also, a global food crisis is expected owing to drastic climate change in the last few years. What are India's challenges ahead? Plus, what are its strengths that can avert a major crisis?

RS: The most critical aspect at this juncture would be for the consumption demand to remain robust. As per IIP data, the consumption demand in the economy still remains fragile, even while the core sector is showing signs of recovery. Going forward, as the employment situation improves and inflation comes under control, we are likely to see higher consumption demand. In fact, another high frequency indicator, auto sales, are already showing robust consumption demand.

As far as MSMEs are concerned, they have been hit harder by the pandemic and would take more time to recover. The global slowdown and low external sector demand will further worsen the pain for many of the players in this segment. Some of the support measures announced by the government for MSMEs during the pandemic, like ECLGS (Emergency Credit Line Guarantee Scheme), have helped in the revival of this segment.

The food crisis being witnessed due to climate change has worsened the recovery path for most economies, including India. While in the last few months, the pressure due to high global commodity prices has abated to some extent, high food prices due to domestic factors are playing havoc. Wheat and rice production in the current year has been adversely impacted by weather conditions and is reflecting itself in higher food inflation.

The near to medium term challenges for India are sticky inflation, a high twin deficit (current account deficit and fiscal deficit), slowing global growth and its implications through various channels.

The strengths that India enjoys at the current juncture is a healthy balance sheet for corporates and banks. Ample forex reserves and relatively lower external debt to GDP ratio are other supporting factors in this period of global turbulence.

MS: The GST burden escalates pressure on the common man amid the rising inflation. (eg. the packaged food has GST levied on it; the dead's cremation has GST levied on it etc). What kind of measures must the Centre look at to balance out this economic act so that the masses find relief amid the rising unemployment and job loss rate?

RS: The increase in the GST rate on packaged food aggravated the inflationary scenario at a time when the economy was already struggling with high inflation from various quarters. However, the government has been taking some other measures to relieve the inflationary pressure. For instance, the cut in excise duty on petrol and diesel was aimed at providing some relief to the masses from high fuel inflation. Similarly, the government has announced a cut in customs duty on some items and imposed export restrictions on some agricultural commodities to relieve domestic inflationary pressure. The government has also announced an increase in food and fertilizer subsidies in the current fiscal year. Further fiscal stimulus is difficult at this juncture given the already high budgeted fiscal deficit.

Apart from the inflation controlling measures announced by the government, the Central Bank has also been tightening monetary policy in a bid to tame inflation. The impact of measures announced by the Central Bank on inflation will be seen with a lag of a few quarters. Moreover, the cooling of global commodity prices will, to some extent, offset the adverse impact of weakening rupee on domestic inflation.

MS: GST is even on food, but not on fuel prices. Your take on the same.

RS: The current fuel taxation structure is complex, with both the centre and states levying different taxes and cess on petrol and diesel. There is overall very high taxation on fuel, with Centre and State tax combined accounting for around 50% of the retail price. Given the high revenue that Centre and States will forego, it explains their reluctance to bring fuel under the ambit of GST.

With the need to ensure revenue neutrality under the GST, moving fuel under the GST will be a challenge. However, as the GST system stabilizes, we should look at eventually moving all items, including fuel, under the GST ambit.

Inclusion of Petrol/ diesel under the GST will reduce the tax burden on consumers, while also removing state-wise disparities in fuel prices. This will also remove the whole complication of the Centre imposing more taxation on fuel through cess and surcharges, the revenue from which is not shared with the state governments.

Bringing fuel under the GST will remove all these anomalies while also reducing overall tax burden on the consumers. However, we will have to give more time for both the Centre and the State Governments to be ready to bite the bullet.

MS: Without a foolproof cyber law in place, what's your take on the future of digital currency plans in India? How must India stride ahead towards financial security for its masses, which are still recovering from the COVID19 pandemic losses?

RS: Digital currency plans are still at a nascent stage, with the RBI recently launching its pilot project on CBDC. The CBDC will reduce the operational cost for the Central Bank and ensure consumer protection, even while providing the benefits of virtual currencies. The CBDC will also facilitate a more efficient payment system. However, the most critical aspect will be readiness of the banks, other financial intermediaries, and the public to use digital currency. For any digital currency, preparedness in the form of cyber security will play an important role in effective adoption.

Moving ahead, it will also be important to analyze the benefits and challenges of digital currency for population groups with different levels of literacy, access to hardware and internet connectivity.

MS: What is your take on the revival of the aviation sector amid TATA taking over Air India and Mr. Jhunjhunwala launching a new airline?

RS: India offers huge potential for the Aviation sector in the medium to long-run. On the demand side, the scope is enormous given India’s huge population, rising disposable income, rising aspirations, and need for mobility. There is also government support in the form of infrastructure development. In the last few years, we have seen many new airports coming up in smaller cities. There has been a concerted effort to improve the last mile connectivity. Hence, in the long run this sector has strong growth potential. The recent developments in the sector, in the form of ownership changing hands and new players entering, will have a positive impact. This will result in increased competition, more efficiency, and better service delivery.

About Rajani Sinha

Rajani Sinha is the Chief Economist of the CareEdge Group. Rajani has nearly two decades of experience in the field of macro-economic research. Before joining CareEdge, she was the Chief Economist and Head of Research at Knight Frank. She has also worked with top institutions such as Aditya Birla Group, Kotak Bank and J M Morgan Stanley. Actively devoted to demystifying the financial world, she regularly writes opinion pieces for business dailies on varied economic issues and occasionally delivers lectures at educational institutions. She is an alumna of Delhi School of Economics and Lady Shri Ram College.

About the Interviewer

Mahima Sharma is a Senior Journalist based in Delhi NCR. She has been in the field of TV, Print & Online Journalism since 2005 and previously an additional three years in the allied media. In her span of work she has been associated with CNN-News18, ANI - Asian News International (A collaboration with Reuters), Voice of India, Hindustan Times and various other top media brands of their times. In recent times, she has diversified her work as a Digital Media Marketing Consultant & Content Strategist as well. Since March 2022, she is also an Entrepreneurship Education Mentor at Women Will - An Entrepreneurship Program by Google in Collaboration with SHEROES. Mahima can be reached at media@indiastat.com

Disclaimer : The opinions expressed within this interview are the personal opinions of the interviewed protagonist. The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.