-What's in store for the rural economy going into FY25?
-Will the upcoming #FOMC impact the budget?
Niraj Shah speaks to HSBC's Pranjul Bhandari on 'Budget Expectations'. #NDTVProfitLive
-Will the upcoming #FOMC impact the budget?
Niraj Shah speaks to HSBC's Pranjul Bhandari on 'Budget Expectations'. #NDTVProfitLive
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TVTranscript
00:00 In all our conversations from Monday, we are talking about this week as arguably being
00:06 the most important week for risk assets because it's the week of Fed speak and it's the
00:12 week of budget and in India in particular, while the question mark remains about whether
00:16 this is a vote on account.
00:18 If the 2019 experiences anything to go by, this may be a lot more than that.
00:23 Who better to put all of this into perspective and the budget math into perspective than
00:27 Pranjul Bhandari of HSBC.
00:29 Incidentally, HSBC has also come out with India's first flash PMI numbers.
00:33 So we'll talk a bit about that as well.
00:34 But Pranjul, great having you.
00:36 Thanks for taking the time out.
00:37 I'm just trying to understand whether you believe that this could be a budget which
00:42 could dwell a lot more on fiscal consolidation and therefore do we see some moderation in
00:50 the impetus that the government has hitherto given in the past few budgets, predominantly
00:54 on infrastructure and CapEx, but maybe to some other areas as well.
00:58 Yes, I think I agree with you there, but it's in line with what the government has been
01:03 talking about in the last couple of years.
01:06 It's not just something only for this year.
01:08 I think the general sense of this government is not focusing on the volume of spend, but
01:14 the quality of spend.
01:15 So our sense is that they'll bring down the fiscal deficit in line with the consolidation
01:20 path this year and then next year again.
01:23 And overall, they'll bring down the overall expenditure as well.
01:26 But within that overall expenditure pie, they'll improve the quality of spend, moving away
01:31 from current expenditure more towards capital expenditure.
01:34 I think that has been a theme of this government and it will continue to be so.
01:38 Fiscal discipline, fiscal consolidation, but high quality of spend.
01:43 Okay.
01:44 Pranjul, when the last budget came out, I remember you were amongst the first ones to
01:47 talk about this quality of spend, about the fact that the government has not doled out
01:51 freebies but instead spent money where it still benefits the rural household but results
01:57 in CAPEX.
01:58 So my question is, will we see moderation of any key capital expenditure, nation building
02:05 related themes, or do you think both can happen parallelly?
02:09 Because I was trying to think of avenues for revenues and tax revenues being there, yes,
02:15 but disinvestment revenues have largely been absent in this fiscal.
02:18 So how does it augur for FY24?
02:21 And will there be some material references made to FY25 numbers?
02:26 Or do you reckon the best will be kept for July?
02:28 Well, look, my sense is that whatever budget we get on the 1st of February is largely the
02:36 budget for the year.
02:37 You know, I don't really foresee too many changes when we see another budget in June-July.
02:43 And the big reason for that is that there are very limited contours that the central
02:46 government has to fiddle with.
02:48 It has to bring down its fiscal deficit from 5.9% in FY24 to 4.5% by FY26.
02:55 This is the middle year, so it will bring it down to perhaps 5.3% of GDP.
02:59 So when you're bringing down the fiscal deficit, you don't have space to do too much extra
03:03 spending here or there.
03:04 My general sense is that in FY24, CAPEX spend was 3% of GDP.
03:10 In FY25 also, it will stay about 3.3% of GDP.
03:13 So unchanged capital thrust.
03:15 In rupee terms, there could be some increase.
03:18 So from 9 trillion to 10 trillion rupees, you know, between FY24 and FY25, which is
03:23 about a 10.5% year-on-year increase.
03:26 So this is still a very good number at a time, you know, when fiscal deficit is coming down,
03:30 even though it's not as good as the last few years we've been seeing, closer to 30% year-on-year
03:35 growth in CAPEX.
03:36 So I would say they'll maintain CAPEX thrust, but they can't accelerate it at a time of
03:41 fiscal consolidation.
03:42 But I just want to take a step back here.
03:44 Actually, the real story of FY24 wasn't central government doing CAPEX.
03:49 The real story was state governments doing CAPEX.
03:51 And a lot of people miss that out.
03:54 You know, state governments, which were literally not spending, you know, in the pandemic and
03:58 the one or two years after pandemic, suddenly started spending in FY24.
04:03 And CAPEX spend rose 45% year-on-year.
04:07 Very strong numbers.
04:09 And I think that has been a huge source of growth, particularly construction jobs, particularly
04:14 rural demand over the last 12 months.
04:18 So we should always think of CAPEX as centre plus state combined.
04:22 And if you combine the two, my sense is we are at our best in terms of growth rate right
04:26 now.
04:27 Next year, the growth may not be as high, but in terms of percent of GDP, the thrust
04:31 will be maintained.
04:32 Got it.
04:33 And absolute numbers also might look okay.
04:35 Prajal, maybe I thrust a few things that were top of my mind at you at the start.
04:40 Let's try and understand what is it that you are watching out for the most when it comes
04:43 to FEB first?
04:44 Well, a lot of things, as in, of course, the fiscal consolidation part.
04:51 Still there are pockets who say that there will be some slippage because this is a pre-election
04:55 year.
04:56 That is not our base case.
04:57 But, you know, again, we'll have to watch out for that, that how well the government
05:01 sticks to its 5.9 for FY24.
05:03 And next year, does it really bring it down to 5.3 or does it go with slightly higher
05:08 fiscal deficit like 5.5?
05:10 So I think one would be this.
05:12 The second, which I think the bond markets will be really focused on is the amount of
05:15 borrowing that the central government will do.
05:17 See, if you want to bring down the fiscal deficit, then your borrowing also should come
05:22 off.
05:23 And if it comes off in a meaningful way, then I think that would be very positive for the
05:27 bond market.
05:28 So my sense is bond market is thinking about a 15.2 trillion borrowing in FY25.
05:34 If it's any number which is lower than 15.2 trillion, and there are some ways that can
05:39 happen if RBI and the government do switches, then I think that would be extremely positive
05:44 for the bond market.
05:45 I think that's something we want to hear about.
05:47 And the third is CapEx.
05:49 You know, the BE, the budget estimate for FY24 was 10 trillion.
05:54 We think they'll end the year slightly lower at 9 trillion.
05:58 What is the BE going to be for FY25?
06:01 So you know, look out for these three.
06:03 But again, I think we have to also look at state governments.
06:07 And I'm sure we can talk about it later.
06:09 We have to look at what RBI will do, you know, after the budget is over.
06:12 Yeah, so I'll come to the RBI in a moment, as you said.
06:15 But since you've dwelt upon the state government part a couple of times already, I'm just trying
06:19 to understand in terms of numbers, you laid out the broad-based numbers.
06:24 But is this something that came as a bit of a surprise to you as well?
06:28 Because as you said, post-COVID, there's a bit of a pause.
06:31 And does this, in some sense, Pranjal, give a bit of a leeway to the central government
06:35 in its budget, because hitherto, the hope was that, OK, post the central government
06:40 doing the CAPEX, private CAPEX hopefully will pick up its mantle.
06:44 While that didn't happen, if the state government CAPEX is very high, in some sense, does that
06:49 come at a bit of a helping hand to the central government when it makes the budgetary allocations?
06:55 Absolutely.
06:56 As in, if you look at only the central government, you know, then increasing CAPEX by about 20-25%
07:03 year-on-year in FY20-4 was meaningful.
07:07 But maybe it would not have been meaningful enough if you think about the backdrop.
07:11 The backdrop was an early New Year.
07:14 The rains were not good.
07:15 Rural crop production wasn't very good.
07:18 Rural incomes were not very good.
07:20 And I think the fact that the state government zoomed in with such huge CAPEX spending provided
07:25 all of this construction activity around the country that many rural Indians who were not
07:31 able to make much money out of like sowing activity actually just took off for the construction
07:35 sector.
07:36 And you can track this data.
07:37 The Aadhaar Enabled Payment System, AAPS, tracks rural remittances from urban India
07:42 to rural India.
07:43 And that has soared quite meaningfully from September onwards.
07:47 So there has been some helping hand to rural incomes on the back of this CAPEX, which is
07:54 an ideal thing for a pre-election year.
07:57 So this has been a good backdrop.
07:59 And I think that is one of the things which has not put so much of pressure on the central
08:03 government to do some rural solve, to do some rural scheme.
08:06 True, we will find some small scheme announced on 1st of February.
08:10 But my sense is that it's not like a government that is dealing with rural distress in a big
08:16 way.
08:17 Yeah.
08:18 OK, so two questions that I'm trying to think which one should I ask first.
08:20 OK, let me ask this rural question first, because the last time that we spoke, you mentioned
08:24 that at the margin, in some parameters, you had started to see some positivity in the
08:32 rural income/rural spend, as the case may be.
08:35 And it was not all bad at the rural end, the way the market was perceiving.
08:39 I believe this was a conversation that we had sometime in November, Pranjul, if I'm
08:42 not wrong, or maybe early December.
08:44 I would love to understand from you this belief that some quarters have that the government
08:48 will have to or will go ahead and do some spends on the rural side.
08:54 They shied away from it in the last budget.
08:56 Do they really need to?
08:57 Or do you believe that rural by itself is showing a bit of a cyclical pickup?
09:01 Well, it's a toss up, like in this perspective of what will the central government announce.
09:08 It could be anything.
09:09 But my sense is the pressure is not immense to announce a very big package.
09:14 And I think, look, I'm not for even a moment saying that rural incomes are doing extremely
09:18 well.
09:19 They are not strong, because it is an El Nino year.
09:22 But it could have been even worse, given how much Kharif production was down.
09:27 And it has not been that bad, because there have been remittances out of the construction
09:31 sector into rural bank accounts.
09:33 And rural Indians have a little more cash in their bank accounts right now than anyone
09:38 would have imagined or they had about six months ago.
09:42 So I think things have been slightly better for rural Indians on the back of construction.
09:46 Also, I think I mentioned this earlier.
09:49 Generally speaking, financial cycles, bank lending cycles, construction cycles go hand
09:55 in hand.
09:56 They can be about three year or four year kind of cycles.
09:59 And I think we are in an up cycle there.
10:01 There is construction activity.
10:03 There is bank demand, supply of mortgages.
10:07 People are taking loans.
10:08 All of that, in a way, provides an ecosystem in which you need people to come and work
10:13 in these construction sites to build out all kinds of real estate or even infrastructure,
10:16 which the government is trying to focus on.
10:19 And that is a buffer for rural incomes at a time when rains can be volatile.
10:24 Okay, fair call.
10:26 The other aspect, Pranjal, like I mentioned, that a lot of, I mean, non-budget, but I'm
10:30 just trying to understand from your perspective, the long-hoped private CAPEX uptake in select
10:36 sectors may be happening.
10:37 Overall, I do not know what your view is.
10:39 But my question is, do you anticipate that this combination of central government pushed
10:44 CAPEX plans plus what you mentioned, state government, the real story, the state government
10:48 CAPEX in 2024 or FY25, FY24 as the case may be, do you reckon at some point of time that
10:54 leads to private CAPEX really being visible across the board?
10:59 Look, you know, all of this provides a helping hand.
11:03 But you need other parts of the ecosystem to also be cooperative.
11:07 And the part that has not been cooperative is macro certainty.
11:10 Around the world, you know, we have commodity prices which go up and down.
11:15 We are still not sure when central banks of different advanced economies will really start
11:21 cutting rates.
11:22 We have a very sort of a, not a clear handle on where global growth will go.
11:30 These are not times in which private CAPEX really takes off anywhere in the country.
11:35 And we have to keep that backdrop at the back of our minds.
11:38 It's great that the government is doing CAPEX.
11:40 We need all of this infrastructure build out.
11:42 But that doesn't automatically mean private CAPEX will come in.
11:45 Although I must say, I do believe that if the macro environment does stabilize in the
11:50 next couple of months, then we have a good chance for private CAPEX to take off.
11:55 But then there's just so many uncertainties out there, right?
11:57 Like Red Sea issue, so many elections.
12:01 So we just, I think we'll have to be patient until it really takes off.
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15:00 >> The other aspect is what the government is doing, right?
15:03 Subsidies, for example.
15:05 Is there a bit of a holding pattern that you believe could be there?
15:09 Free food extended, but maybe fertilizers and
15:11 some others taken back with rationale.
15:13 What are your thoughts around this subject?
15:16 >> Yeah, that's a good question.
15:17 As in, remember a couple of years ago, we were all talking about how we can do
15:22 fuel subsidy reforms, which I think we did.
15:25 How can we do food subsidy reforms and
15:27 fertilizer subsidy reforms, which we did not do.
15:30 And in a way, through the pandemic,
15:32 we didn't focus on streamlining these subsidies further.
15:35 And food and fertilizer subsidies still remain extremely large.
15:40 I would say that if somebody was to ask me my wish list for
15:44 the government which takes on from June onwards,
15:48 I would say the food and fertilizer subsidy reforms.
15:51 There's a lot that can be done.
15:53 These can be streamlined in a very meaningful way.
15:58 But we'd have to see if that happens, as in that would be on top of my wish list.
16:02 I think a lot of fiscal saving can happen by just streamlining some of these
16:06 subsidies.
16:07 >> Could you elaborate on that, Pranjal?
16:08 It's something that we can actually put out as a separate piece as well.
16:11 But would you elaborate what you mean by this?
16:14 >> Yeah, so look, fertilizer subsidy,
16:16 there was earlier a practice of keeping the subsidy per unit of fertilizer
16:21 unchanged.
16:22 And then if prices go up and down, the farmer has to take that burden.
16:26 But I think in the pandemic period, that whole practice sort of turned on
16:30 its head and it became the other way around.
16:32 That the price farmer pays was kept fixed and
16:36 the subsidy amount goes up and down according to where global prices are.
16:40 So I think this is something that sort of came in the way of fertilizer subsidy
16:44 reform.
16:45 In terms of food subsidy reforms, of course, bringing the states on board to have
16:50 a national food subsidy scheme.
16:53 And over time also experimenting with cash subsidy,
16:57 cash rather than kilograms of wheat and rice is something we haven't advanced on.
17:04 So I think these are very important parts of the budget.
17:06 But I don't think these are going to be talked about in the current budget on
17:10 1st February, perhaps not even in the June-July budget because it will be too soon.
17:14 But I'm hoping that the first budget in 2025 really picks all of this up.
17:19 >> Pranjal, coming as this budget speech is a day after Fed speak,
17:25 the first policy from the Fed coming out.
17:28 And I know you mentioned that adequate importance need to be also given to
17:33 what the RBI does post-budget as well.
17:36 Now put this into perspective, one, from a budget angle, two,
17:39 not so much as much from a budget angle, but from what the broad policy would be.
17:44 Because the Fed, while the PC inflation is below the 2% mark,
17:48 but the U.S. economy has grown well.
17:50 So does the Fed sound a lot more hawkish than what the street otherwise may
17:53 pencil in?
17:54 Does that have any ramifications at all on this budget?
17:59 And then subsequently on the RBI meet?
18:05 >> Yeah, I think you dropped off for some time.
18:08 But my sense is you're asking about Fed and what this means.
18:12 Look, yeah, I think cues from the Fed are going to be very important in terms of
18:16 like really when could Fed move?
18:18 You know, the markets are all over the place.
18:20 Our own house view in HSBC is that the first Fed rate cut will not be before June.
18:26 It will be June and markets are expecting earlier than June.
18:30 So it will be good to get some clarity on really when Fed is going to move.
18:34 But I think more important than that, I wanted to make this important point
18:38 that there's something called fiscal impulse that economists talk about.
18:42 That's the impact of fiscal policy on growth.
18:44 Since FY19, the fiscal impulse has been positive for India.
18:48 The government has been contributing to GDP growth.
18:51 FY25 will probably be the first year in which there's going to be a fiscal drag.
18:57 The government will not be contributing to GDP growth.
19:00 And that is because it's wanting to bring down its fiscal deficit.
19:04 And, you know, when you bring down your fiscal deficit, you cut spending,
19:08 and then you don't positively impact GDP growth.
19:11 So my sense is FY25 will be the first year in many years in which the fiscal policy
19:16 will take a step back.
19:18 But I also think it is the right stage for the monetary policy to take a step forward
19:23 and loosen monetary conditions.
19:25 I say this not only because fiscal will be taking a step back.
19:29 I also say this because inflation is really coming off.
19:32 You know, last month, food inflation was about 8%.
19:36 Next month, which is the January data, which will come out on 12 February,
19:39 my sense is food inflation will be close to 5%.
19:42 We've come a long way in taking a lot of intervention and steps
19:45 to bring down food inflation.
19:47 Core inflation has been falling.
19:50 You know, commodity prices fell, manufacturers were able to cut output
19:53 prices, and, you know, many of the fuel prices, at least so far,
19:57 remain unchanged.
19:59 So overall, inflation could come down and actually average 4.5% over the next
20:04 three months, lower than what RBI is expecting.
20:07 RBI is expecting 5.2%.
20:09 And I think this is really a time for the RBI to start losing.
20:13 Now, I don't think RBI is going to go and start talking about this
20:17 and cut repo rates immediately.
20:19 No, I don't think that will be the policy.
20:21 Instead, our sense is the policy will be to play on the liquidity front.
20:24 Liquidity has been extremely tight.
20:26 Overnight call money rates have been extremely high.
20:29 Our sense is that the central bank will slowly start providing more liquidity
20:33 in terms of, you know, opening up the repo window and so on and so forth.
20:38 And our sense is over time, all of these short-term call money rates,
20:42 overnight rates will start coming off.
20:44 And via this liquidity itself, the RBI can actually provide about 40 to 50
20:48 basis points of easing.
20:50 So even if repo rate cuts don't come for a long time, and I don't see any
20:53 space for repo rate cuts, at least until June, I think some easing on the
20:58 back of liquidity can start, you know, as soon as February.
21:02 Do we risk going into a bit of a pronounced "slowdown"?
21:06 I'm not essentially calling it a slowdown, but unless the RBI's reflex
21:10 changes, I know you mentioned June, but whether in June or earlier,
21:14 because of the way that one, as you said, the government impetus will not be
21:18 on growth, and the world as we know, despite U.S. growth numbers of 2023,
21:22 is not a happy place for growth, Pranjal.
21:26 Well, look, you know, I don't think we're in a very stressful situation,
21:30 let's put it this way.
21:31 I think there are a lot of levers that can still provide us growth.
21:35 And, you know, I must actually talk about our PMI flash index, which really
21:41 showed how in January, service providers have seen a huge increase in their
21:46 activity.
21:47 Now, this is very interesting, because India's post-pandemic recovery was
21:51 mostly led by manufacturing.
21:53 Manufacturing today stands 30% higher than pre-pandemic levels, but services
21:57 is only 17% higher than pre-pandemic levels.
22:00 So services have a huge leg to run even now, and I felt like the first signs
22:06 of services activity really picking up came in a dramatic fashion in this
22:11 January number.
22:12 So if that were to continue over February, March, I think we can continue to get
22:16 some good growth momentum from the services providers, not as much from
22:20 manufacturers.
22:21 So I don't think we're in a dire situation on growth, but yes, given that we had
22:25 such strong government spend last year, which is likely not to continue over
22:29 the next year, things may not be as buoyant as last year.
22:32 So it will not fall dramatically, but it won't be as buoyant as last year.
22:36 We will be sort of middling, you know, a little bit.
22:39 My sense is growth will be about 50 basis points lower than last year over the
22:43 next 12 months.
22:44 So I think at that point, having a monetary policy which turns a little
22:49 loser, I think is a great situation to be in.
22:52 Okay.
22:53 Well, let's end with that, because it's a bit of a unique thing, right?
22:56 The Flash India PMI, it's not happened before.
22:59 You guys are kind of championing it, if you will, if I can use that term.
23:02 And you mentioned that the first indicators were good.
23:05 I went through that report with keen interest, Pranjul, and you mentioned
23:10 that manufacturers were able to pass on some of the price inflationary
23:15 pressures that came in with growth, but not the same luck for everybody.
23:19 So is there any takeaway from here, or is this a wait and watch mode, and you
23:23 will probably be able to talk more about it as you look at the other numbers
23:29 over the course of the year?
23:31 What's exciting about the PMI Flash is that you get to know how the economy
23:36 did in, say, January, even before January is over, because by 24th of January,
23:41 we take out the results.
23:43 You know, we ask 800 manufacturers, come service providers, to give their
23:48 assessment of the month by the middle of the month.
23:50 And by about 24th of that month, about 80% to 85% of responses come in,
23:56 give us a great sense of how January is looking.
23:59 And I think by that, some things were clear.
24:02 New orders, even new domestic and export orders for both services
24:06 and manufacturers have picked up.
24:09 There's a lot of activity out there.
24:11 Future expectations are also buoyant.
24:14 In terms of prices, our sense is that input prices are rising for service
24:18 providers because there's so much of demand.
24:21 Labor is working overtime, so they have to give overtime wages.
24:24 Right now, they're not passing it on to the consumers, so consumer prices
24:27 are not rising.
24:29 They're taking the hit on their margins.
24:31 So profit margins are going down a little bit.
24:33 But profit margins were elevated, so if it comes down a little bit,
24:36 it just about goes back to long-term average.
24:39 So we are not too worried about their profitability, but we are excited
24:42 about the fact that, you know, services could drive growth
24:45 for the next couple of months.
24:48 Okay, Pranjul, we'll leave it at that.
24:50 Thanks so much for taking the time out and being with us.
24:52 Really appreciate your time.
24:54 Good to be here. Thank you for having me.
24:56 Yeah, the pleasure is ours. And viewers, thanks for tuning in.
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