After growing over 8 pc in FY2024, HSBC’s Pranjul Bhandari sees India’s GDP growth normalising to around 6.5 pc. Here’s Why- The Week

India’s economy, which grew over 8 per cent in the previous financial year ended March 2024, has seen a sharp slowdown in the recent quarters. The second quarter GDP grew just 5.4 per cent. The first advanced estimates for the current financial year estimate GDP growth at 6.4 per cent. To understand what’s behind the economic slowdown and what’s the outlook, THE WEEK recently spoke with Pranjul Bhandari, chief India economist at HSBC. Excerpts:

Indian economy was going strong not so long ago. What’s behind the slowdown we are seeing now?

I think there are two things going on at the same time. One is that there were a couple of very specific factors that hurt the September quarter, which could reverse somewhat in the next two quarters. But the other thing that’s going on is that growth is normalizsing towards its trend growth, where it should have always been.

There were things that were very specific to September; we just came out of this whole bad season with heat waves and at least in the beginning, the rains were volatile. So, most of it kept the whole September quarter not very great from the agricultural side. And then we had these unseasonal rains and then rains stayed on for longer than expected.

Government was also not spending much. It literally picked up spending in October. But for much of that quarter, spending had been fairly weak. Spending so far in the year has been pretty weak by the central government, because in the election period, there was a slowdown for a few months. So, I think these two are very specific to September, which have already shown signs of reversal after that.

The agricultural production has picked up compared to where it was a couple of months ago. Government spending has also gone up from October. This will show up in the December quarter. So my sense is eventually growth will pick up. I think it will be a 6 per cent plus number.

You mentioned about growth normalising towards the trend growth…

We are not a 7.5 per cent growth economy. The kind of growth numbers we saw in the last two years, a lot of it was coming out of a low base; in pandemic, many things were very slow. So just that catch up growth in the beginning can be quite fast. We saw that in many countries. also we had some new sectors that picked up after the pandemic. And because these are new sectors, for example, GCCs (global capability centres). In the initial years, they were able to grow at a very rapid pace.

So GCC on its own was growing at like 35 per cent for two years. But it can’t be growing at 35 per cent year on year, every single year, right? At some point the base becomes a bit hard. And then growth actually normalises to about 15-20 per cent, which on its own is not bad at all.

All of this adds up to GDP growth, as the base normalises. And the base is normalising. My sense is the kind of growth numbers we are going to see in the foreseeable future are going to be on average closer to about 6.5 per cent.

India’s potential growth is 6.5 per cent, which, by the way, is a very strong growth number in this sort of, you know, global backdrop. If you want to increase this clip of growth, it’s going to happen with reforms. You know, increasing the potential growth always is a painful process, reform-driven process.

FMCG companies have flagged a slowdown in urban markets. We have seen slowdown in auto sales data too. How much of that is kind of consumers pushing away discretionary spending? The lower and middle class, in particular, would be spending a lot more money on food. And given the way food inflation has panned out in the last few quarters, is that going to be a big impact to watch out for?

We did a very interesting study. We brought together 100 indicators of growth, and we mapped them to the different sectors, and we found that 55 per cent of the economy continues to grow at a positive clip. The only problem is that last quarter, about three months ago, 65 per cent of the economy was growing at a positive clip.

So on the margin, things have softened, but 55 is still a good number. But when I say on the margin things have softened, and when I sort of break down where exactly it has softened, it’s literally all coming from urban consumption.

There are three reasons why that growth has softened now and could remain soft for a while. One is, again, it was being driven by all of these new sectors like GCCs, which are now normalising to more sustainable levels. Salaries will also mirror that.

Consumer credit has softened, and that is by design, because the RBI increased risk weight with a view on financial stability. I think it’s a very good step. But that has slowed. So that’s the second reason.

Thirdly, there is the wealth effect. You were really enjoying these large wealth effects in equity markets. You may not be encashing it, but just the fact that, you know it’s there and on the back of that, the sentiments to spend was very high. I think that could have got a little bit more diluted now, given the equity market correction recently.

So I think all of these three are hurting high-end consumption. And when it comes to sort of your more mid-end, like your middle class that you were talking about, I think inflation plays an important role there. The fact that the price of necessities, food has been so high, you end up cutting back on many of the other expenses.

You think this consumption slowdown is temporary or this whole impact inflation has had on the middle class India will take a few quarters to turnaround?

One bright spot is rural consumption. My sense is that rural may begin to look much better in 2025. Rural incomes have been fairly weak in the last two-three years. We have had a lot of climate change events. I can see that agricultural production has gone up now. And on the back of that, my sense is that rural consumption is a bright spot to watch out for. We haven’t seen it play out yet, because rural Indians have focused on building back savings, or maybe repaying debts. But I think that’s something that could build up around March or so.

My sense is that the money farmers made from the summer crop, the Kharif crop, was used to actually build back those cash balances to at least this minimum watermark level, which I tracked. The money that they make from the Rabi crop, which they will get between February and April, they may use that more for consuming.

Do you think the government will be able to catch up to the spending that they missed in the first half because of elections?

I think we lost some important months in terms of capex spending because of elections.

You can make up current spending, like instead of giving somebody Rs 100, you can put Rs 200 in their bank account, right? So, you can make up current spending, but it is hard to make up capex because if your capability is to build 15 kilometers of road per day, you can’t suddenly build more because more money is available. So, I think we have lost some important time in capex and my sense is that generally speaking, overall capex for this year will be about 10-15 per cent lower than what the government had budgeted. I am seeing that this whole current spending has picked up quite a lot even in states this year. Overall, expenditure could be a little lower, but, it’s something we are all expecting.

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