There is a shortage of plus 6 percent stories out there: S&P Global's Vishrut Rana

Economist at S & P Global,  Vishrut Rana

S & P has revised India’s forecast to 6.5 percent from 6.7 percent, Economist at S & P Global, Vishrut Rana explains to Shweta Punj from Moneycontrol that a slowdown in consumption activity and a challenging trade environment makes it a tricky environment for India but strong fundamentals, a rising middle class, strong technological growth will continue to power growth. He also added that rising household debt is a positive as it signals greater financial access. Edited excerpts

S&P has revised India's forecast down to 6.5% from 6.7%, you revised the forecast only yesterday. What are the factors that are weighing the India story in your view? Why was there a downward revision that was made?

Vishrut Rana: There are a number of factors that are driving our downward revision for India's growth story in the near term. So towards the end of the fiscal year, we saw a slowdown in consumption momentum in the economy, and also weakness in domestic activity more generally.

This had been going relatively strong, if we look at say the January to June period of last year, this was a period of strength and improvement period, but some of that momentum has faded. And it is coming at a time when the external condition is so uncertain, when the trade environment is looking more challenging. There's also increasing competitiveness in the manufacturing space, particularly with China, more products from China and other Asia Pacific economies moving towards India.

All in all, it's a fairly tricky environment for domestic investment, for domestic consumption and trade. But in spite of that, the fundamental drivers of India's growth story, the rising middle class, and the strong demographic story, the strong technology adoption story is still powering the growth to the 6.5% mark.

When we look at 6.5% growth for a country of India's size with its population, what does it really translate into when we look at it in terms of jobs, in terms of investments, in terms of incomes?

Vishrut Rana: Yeah, that's definitely an important aspect of the growth story for India. What does it mean at the end of the day? If we look at India's overall labor participation rate, that still remains quite low, right, at 40%, in the 40-45% range. So we need to get more people active in the economy. And that's something that growth enables. It creates these opportunities for people to work and to increase their incomes, to improve the livelihoods. And this is really what growth ultimately translates into.

So is 6.5% a good growth rate or a bad growth rate? I would not consider it that way. I think what matters at the end of the day is that living standards continue to rise for the people on the street, the average person. And this is something that we are seeing at a gradual pace, which is important.

If we look at a comparison basis across the world, India is among the fastest-growing economies in the world at the moment. Maybe in Asia-Pacific, we have Vietnam, which is equally fast. But it's also starting off at a lower level of income, right? So there is a long way to go before that growth momentum eases out.

So what do you think are the factors that are working for India? What's exciting you about India at this point? And then I would like you to talk a little bit more about the vulnerabilities. Besides the global vulnerabilities that India is facing, domestically, where do you see the key challenges?

Vishrut Rana: Both are critical questions. Let me start with the positive factors first. What are the exciting stories in India at the moment? There's several. So first of all, we mentioned the middle class. That's definitely one of the key stories, the large market size that the economy provides, the space for firms to grow, for markets to expand.

And that too, this large market size, that is growing at 6.5%. It's definitely a very exciting prospect for investors, for firms, something that is hard to come by in the current global environment, where we have slower growing advanced high income economies and smaller, faster growing economies. India kind of in between that group. It's a large economy and it's also very fast growth. So that's an interesting story.

Another interesting story for me is technology adoption. India is in the forefront in the technology space, especially technology services, adoption. In all these factors, India has an advantage, an early mover advantage, which is poised for future growth. So those are some of the positive factors I can talk about. Turning to the challenges, and there are several of those too. I just spoke about technology being a positive for the economy. On a net basis, it is.

So I see technology being growth positive for India's economy over the next five to 10 years. In the near term, though, there is technology disruption going on in India's economy. We see labor being lost to technology jobs, AI, the rise of AI and automation. Certainly going to lead to some changes in the labor market. The type of work that is available out there is changing, which is challenging, creating jobs, and making these livelihoods available to people is a challenge.

Another challenge is competitiveness, which is what we see.It is pretty hard to compete in the manufacturing space on a global scale at the moment in the current environment with tariffs and trade. So those are two challenges at the moment.

So I also want to talk to you about rising household debt in India, and if that's a challenge. One set of data indicates that household debt in India during 2010-2011 was 8% of the GDP, and that's now edged up to about 37% of the GDP. How much of a concern is that? And what are you attributing the decline in savings and increase in household debt to?

Vishrut Rana: Yeah, that's definitely a very interesting dynamic. For me, there's a little bit of a difference in the two stories. One story being the lower savings rate, and then the other story being the higher debt levels. Let me explain that a little bit. So starting off with the increase in household debt, if we look at the comparison across economies, India's household debt to GDP is actually relatively modest. Households don't typically take up a lot of debt. It's not a common feature of the financial system. Part of that is the lower financial penetration. So some of the upward direction of household debt may be seen as a positive for me, in the sense that it reflects greater financial access for household. But the flip side of that is the other story, which is the reduced savings.

Any assessment on what are the reasons for a fall in savings? Is it because Indians are spending more? Or is it because they are earning less?

Vishrut Rana: Especially over the recent year or so, I think the slower momentum in the economy is one of the factors that is pushing households into lower savings, and also partly into taking up debt for funding durable goods purchases, which is a future strain on the balance sheet of the household. So this softening growth momentum is a factor that is driving the lower savings rate. And then in turn, that means lower consumption and lower growth momentum, right? So it's a bit of a cycle.

How do we stop that cycle? Or how does the economy get out of that? So one factor that we see is that we expect interest rates to come down over the course of this fiscal year. We expect another 75 basis points of cuts. The slightly easier monetary policy should help in financing. But ultimately, it has to be a very strong growth and job story that lifts households out of that savings cycle.

So in the budget, we saw that there was some tinkering around the tax rates. And that was an attempt to boost consumption in India. I wanted to get your thoughts in on that, on the impact of the volatility of the equity markets on the India consumption story. Is it something that's going to be short-lived? Is it only going to be impacting a certain section of India? Or do you see wider ramifications of that?

Vishrut Rana: This is a very nuanced story regarding the equity market and participation and the volatility that is a feature of the Indian equity space. So let me kind of try to break that down. So first of all, we see a higher capital market size as being a sign of stronger investment in the future, in the sense that because firms are able to access this strong retail investor base, the capital market, the equity capitalization to GDP ratio is quite good. It's high in India, which is positive, because they can access capital more easily. So that is a positive, right? On the other hand, the flip side of that is the volatility that you speak about. Equity valuations change very frequently from minute to minute. And in recent months with foreign portfolio outflows, we have seen an increase in equity market volatility.Certainly has an impact on discretionary spending at households. It definitely does. It makes consumption a little bit more volatile.

On the other hand, there is a divide in terms of the type of investor who is participating typically in financial assets, right? So this is going to be people with savings who are involved in that space and who will have a little bit more buffer for their consumption spend. So net net, we think that a deeper capital market is generally a positive for economics, right?

Okay, you know, there's something interesting. The finance ministry told the parliament that they've expressed concerns that a lot of households are moving their deposits from banks to market-linked financial instruments seeking better returns.And that the government has, you know, raised as a red flag issue because they're saying that this could lead to monetary losses during periods of uncertainty. Do you see merit in this argument, Vishrut?

Vishrut Rana: That's an interesting trend. I mean, it just, so one thing it tells me is that there's this demand out there for innovative financial products and everything. But certainly from a bank perspective, that is a challenge because we lose some of the deposit base and the access to funding. So net net, there probably has to be a balance. In terms of banks offering competitive interest rates for savers, that's a more, it's going to have implications for monetary policy also over the longer run, right? Because if monetary policy impacts the money market instruments more than the deposit rates, then households can kind of leverage that. So challenging from a bank's perspective, interesting that the government is also pointing that as a red flag. So certainly something for households to be cautious about.

Okay, I also wanted to get your thoughts in on monsoons. You know, what is the outlook that you're working with? And the impact of this year's monsoons on the Indian economy? How vulnerable is India at this point to the rains? The need for a good monsoon, how precarious is it for us at the moment?

Vishrut Rana: Yes, again, a very critical story for us to think about this year, because lower inflation is a key part of our forecast narrative. So the monsoons will definitely play a key role. We don't, of course, we take the monsoons as a given for our forecast. We assume a normal monsoon for the coming fiscal year. There are several variables that are affecting that dynamic. So one is that this greater allocation from the government to the rural sector in the recent budget, that has provided some buffer to rural consumption, and it should also support agricultural activity in the near term. So that should be a supporting factor. On the other hand, though, the agricultural price sensitivity to the monsoon outcome is still pretty high. So that is a risk factor for us in terms of the weaker monsoon could lead to higher inflation and less easing from the central bank, which is a negative for the economy.

Okay, and how do we monsoon-proof our economy, Vishrut?

Vishrut Rana: There are definitely steps being taken in the right direction, right? Rural infrastructure is key with the Gram Sadak Yojana that is going on at the moment. That offers an opportunity to bring improved transportation and quicker transportation to the rural and agricultural sector, which is going to be key also. Irrigation efforts have also been increased over time. There's also more technology being deployed in terms of assessing when irrigation is necessary. So steps are being taken in the right direction.

Ultimately, in India, the logistics challenge is still very, very large. Just given the size of the country and where the produce happens versus the urban centers, getting the whole chain established from farms to consumers is, it's going to take time, it will happen. But it, of course, requires sustained investment over a period of time, which means that we're going to be watching the monsoons for the foreseeable several years.

I also wanted to get your thoughts in on the net direct tax collections that have shown a growth of 13.13% as of March 16th for the current financial year. And we've seen that advanced tax collections have also grown by 14.6% to 10.4 trillion rupees, up from 9.11 trillion rupees in the previous year. Does that give you-- is that a source of comfort for you? Or how are you reading into these tax collections? Because they paint a robust picture for the India story. I want to get your thoughts in on what does it indicate to you in terms of corporate profitability and going forward investments coming into the economy from the private sector?

Vishrut Rana: Yeah, so this private investment has been a missing piece of the growth story for a couple of years. And that kind of ties in to this fiscal revenue collection story, which we're just talking about. So the stronger revenue metric for us, there's a couple of factors. I think one is that the improvement in the digitalization of the economy, the traceability of funds and transactions across the economy has led to an improvement in tax efficiency in India. The maturing of the goods and service tax framework has also been another factor.

So some of these are longer horizon, slower burn issues that are just over time, they have taken time to mature and get full results. So partly not a reflection of the current growth story, but really a reflection of the reform efforts in the tax framework that have taken place over the past several years. Having said that, I do think that this is a signal of the more resilient domestic demand that I talked about, that there is still that leg to the domestic demand and consumption story, at least over the next few years.

From a corporate standpoint, there is funds available for capex and indeed we've seen profitability of balance sheets health improve in the corporate sector, but it is not yet translated into investment spending, but that remains a swing factor for us.

And do you feel that there is room for a policy push to give consumption another boost in the economy? Because like you just spoke a little while ago, that the tax cuts, income tax cuts, the gains made from that might have been wiped out with the volatility in the equity markets. So do you think there is a room for that, there's scope for that?

Vishrut Rana: So certainly near-term consumer activity has slowed down.But on the other hand, there's also a need to balance the fiscal outcomes, right? So the government is currently on a path of fiscal consolidation. The projected deficit around 4.4% for this fiscal year coming down from last year is 4.8%. So there is that longer term path. And with my economist hat on, that is quite important for the longer term sustainability of the government finances to prepare for future shocks.

Also, it is important to build up that fiscal space, right? And so at the time, it is quite difficult to support consumer spending when there are so many competing demands for fiscal resources, infrastructure, vulnerability, insurance, and this sort of thing. So it's a very tricky balancing task at the moment. I think there's not fiscal space available to support consumers further this year.

And how about the schemes that have already been rolled out? And we've seen several more that have been announced, not only by the central government, but by different states. Do you see that as a dangerous trend that's emerging out of India that could take our focus away from reforms?

Vishrut Rana: So one thing I should point out is that the recent, for example, the central government budget has been focusing on areas that have not received attention over the past few years, right? So the increase in rural spending, which was a weak part of the economy over the past couple of years, we saw the rural sector outcomes lagging behind urban outcomes. So there is that element of spending moving across different parts of the economy over time. So there's one element to it. I would not read too much into it as moving away from a reform led or infrastructure capex and sustainable growth led economy. I would not read it at that as at the moment. Of course, we have to see how consumers respond to that and how whether this is something that will necessitate, say, higher tax revenues in the future, kind of like what we have in Europe, a more welfare state kind of environment. But that's something that will happen over the course of the medium run. I think for now, there's still a lot of legs in the reform story for India. I don't really see that changing.

So, you know, I wanted to get your thoughts in on the India narrative for the world. We've seen a very strong push to build a narrative. And I just want to get your thoughts in on what do you think is the narrative that India is putting out in the world at this point that might be exciting global investors?

Vishrut Rana: So we talked about this briefly at the start, right, about how India is this large and rapidly growing economy. There's another narrative, which is the tech savvy youthful labor force plugged into global supply chains. India remains very much part of the globalization story at the moment. I think all of those are pretty exciting features for the economy to be in right now. And certainly, there's a shortage of plus 6% growth stories out there, which is one big advantage that the economy has in terms of attracting investment, attracting investors, catching the interest of global players. So those are the factors involved.

I want to also get your thoughts in on China, because now that we have the Trump administration talking about reciprocal tariffs, and Mr. Trump has singled out China and India. So how do you see that disrupting the global trade dynamics? And potentially, how do we see that panning out for India, specifically in terms of trade and our export-led growth?

Vishrut Rana: That's a key issue for us across Asia Pacific this year. I will split that question into two. So I'll take the China question separately, and then I'll talk about India and how India kind of fits into the US trade measures story. So talking a little bit first about China, the US already now has in our estimate about 35% effective tariffs on imports coming from China, which is very steep. And that has disrupted trade flows between the two economies. We've seen a lot of diversion of trade. We've also seen it lead to a lot of uncertainty regarding investment. Another feature, though, is that it has led to a lot of Chinese products moving to Asia Pacific in search of markets and pushing down prices there and increasing the competitiveness and something that we see in India as well. So those are some of the features that we have to contend with.

One really quick point on that, which is important, is that higher tariff rates lead to greater inflation in the US because of the reduced productive capacity. So firms that are sourcing their inputs from China will now have to pay a higher cost and they'll likely have to pass some of these costs on to consumers. So the higher inflation story means higher US interest rates. It may mean slightly slower growth also. So these factors are affecting the external demand environment for India. And then on top of that, we have the tariff story.