Is the state of the economy looking happy?
Neelkanth Mishra: No.
Okay, clear and precise, and it seems like a very definitive, confident answer. What are the markers indicating? Why such a definitive no from your end?
Neelkanth Mishra: The high frequency indicators have been slowing for a while. We have seen a very sharp slowdown in everything from auto sales to cement sales to power demand. In fact, the incremental credit impulse is much weaker than it was in the last couple of years. So, the question for the markets and for all of us is whether this is a temporary cyclical slowdown or is there something more serious? What is clear is that there has been a slowdown in government spending, which is now starting to pick up.
So, the first three-four months of the fiscal year were actually quite bad, but now we are seeing some signs that things are picking up. The monetary conditions on the quantitative side had been quite weak for a while, and after the bank started to slow down lending around March-April, because their loan deposit ratios had gone to a high level and the regulator wanted that to be brought down, it kind of started what I think is a negative spiral, which is that, as you know, deposits are created when loans are given, so if the banks start slowing down credit, deposit growth started to slow as well.
Now, the first signs are that it is starting to ease, so the RBI has kept overnight liquidity in surplus since July. We are starting to see the first signs that deposit growth is now starting to pick up. In the next two-three months, as this percolates through the banking system and as the fiscal spending resumes, one should expect that this slowdown is temporary, but there is no doubting that the current conditions are far lower than what the run rate was six months back.
So, you are not ruling out a structural slowdown? Are you saying that maybe the best of growth, at least in the very near term, could be behind us?
Neelkanth Mishra: Actually, I would say the worst of the growth should be behind us in the sense that we may be going through a cyclical bottom. The 7% odd growth is what the economy can deliver. If you see labour input, capital input, and total factor productivity, that framework still suggests that we should be growing at 7%. We have recently re-emphasised that the return of the real estate cycle and the need to construct a lot more power plants means that the investment cycle is still on a good footing and therefore, it is unlikely that structurally, there is a problem. But what we do need to see is a pickup in fiscal spending and some amount of monetary easing, at least on the quantitative side.I was talking about the government spending, that part would be eased off, hopefully, once the state election spree is over. But do you think private capex is going to come back or not?
Neelkanth Mishra: These are two separate questions. Let me address the first one. So, the fiscal slowdown has been at both levels. There is the central government and there is the state government. So, even state spending in the first five months, the capex was down 7% year on year. Remember that last year, we had a front loaded fiscal cycle, meaning that the fiscal spending was front loaded and therefore, the year on year numbers could be misleading. But what we have seen even for the states is that August was a much better month and while the fiscal data for September will be available only in the next couple of days, there are signs that that number should have been better. For the Centre, the roads and railways capex has been a bit slow off the blocks quite possibly because after the code of conduct was imposed sometime in February to around July when the new ministers or at least the new government was fully in place, there was a slowdown in file movement and those will take a while.
So maybe Jan-Feb is when the high frequency indicators should start showing a recovery. For revenue expenditure, there are signs that there is already a pickup at the central level. So, yes, we should be at the cusp of a recovery.
Coming to private sector capex, that for me is an outcome. What is the input variable? The input variable is the revival in demand for things that require the investments and when you look back and see what had driven the slowdown from 2012 to 2021, where investment to GDP ratio fell from 34% to 27% of that 7% decline, 5% was household investment in real estate. So, it is only when the real estate cycle turns, that you need a lot more of steel and we have shown in our report that the growth in steel and cement demand when real estate construction is on an upswing is 4% to 5% points higher than what it is when the real estate market is on downswing.
So, it is only when you see that kind of demand visibility that capex numbers from the private sector will start to improve and we are seeing that. Steel companies have announced major expansions. We have seen cement companies announcing expansions. We have seen power companies too and that is the second leg, which is that after seven-eight years of no capex in power, we need power capacity.
Remember that just announcements do not add to GDP. Just presales of real estate do not add to GDP. When the houses start getting constructed, the GDP gets affected and that is when the companies which are upstream start to see the demand and therefore start to invest. So, private sector capex for me is an outcome.
If the real estate cycle flourishes like it was the last two quarters, it has also slowed down, but as the fiscal monetary easing starts to show up, if the real estate demand picks up, private sector capex will pick up as well.
When do you think the monetary easing cycle will begin?
Neelkanth Mishra: There is a quantitative side and there is the cost side – the cost of money and the quantity of money. I do not expect interest rate cuts to happen before April. There are quite a few people because of the change of stance in October who started expecting that there would be a rate cut in December. But some of the comments in that monetary policy statement, as well as I think the public remarks by the governor, should have signalled enough that December is not likely.
The headline inflation, in our view, is not going to give room to the MPC to cut rates. Now, it is absolutely right that the MPC or the RBI should be looking at forward looking indicators and not just acting on what is inflation here and now. But given how differently food inflation is behaving, I do not think they will be very confident about disinflation setting in and therefore the room to cut may not be available before April at least.
On the quantity side, the RBI can and it looks like they are already doing so. So, the overnight liquidity moved into surplus after July and is now starting to show up in the 3-month and 12-month funding markets, so the certificates of deposit rates on those have started to ease. They have not fully eased because some banks are still seeing some vestigial effects of the liquidity tightness. They are still trying to solve yesterday’s problem and therefore still holding liquidity, still aggressively bidding for deposits.
But it is like in our markets, in equity markets as well that when something turns, some investors are early at it and then some come in a bit later. So, over the next two-three months, I expect that as the banking system starts to understand that this overnight liquidity surplus means that progressively the fight for deposits will ease, the credit growth should start to then resume because what we have seen is a very significantly weaker credit impulse in the first five-six months of the year versus what we saw in FY22 and FY23 and FY24 and therefore, on the quantity side, I expect that the RBI has already eased.
Whether they will get the confidence to or will see the need to cut the CRR or not, I think that is the high frequency indicators as they emerge and if the RBI feels that there is a need for further easing, I would not rule out perhaps a cut in the CRR as well.
Do you think that inflation is perhaps the sole reason or at least a 90% reason why we are seeing that consumption juggernaut sort of slow down and I am talking about the sub-premium segments across the board.
Neelkanth Mishra: Coming to inflation, I am assuming you were talking about food inflation being the reason. On food inflation, the consensus view is that supply factors are keeping food inflation high. Our view is that there is a very strong demand angle as well. Remember that in the last three-four years, we have seen 14 states, and this number keeps rising, so when we first wrote about it in July, it was 10 states, but now 14 states have announced income transfer schemes. So, we have Rs 2 lakh crore annualised worth of income transfers happening. These are benefiting 20% of India’s adult women and all in the very low-income segments.