India's growth momentum, which picked up sharply after the Covid-19 pandemic, is beginning to slow down, according to Sonal Varma, chief economist at Nomura.
“Our own assessment is that the momentum in the economy is slowing," Varma told BQ Prime in an interview.
"We reach that assessment not on the basis of the YoY growth rate of 4.4%, but really the seasonally adjusted quarter-on-quarter momentum on GDP, which was around 1%...," Varma said. "The one interpretation therefore is that the economy was growing faster than expected post-pandemic."
The recent drop in momentum is primarily driven by the slowdown in exports and global demand, which is also filtering into the manufacturing sector. It can also be attributed to the higher commodity prices, Varma said.
“We did see private consumption momentum also slowed down. So, it does look like the impact of higher inflation on consumption demand has also played out," she said. "There is evidence of the global demand slowing, but I would say this time around also signs of domestic demand moderation, because of higher inflation and margin pressures."
Due to the upward revisions to the past data and considering the base effects at play, it’s becoming difficult to interpret growth numbers from the data being released, according to the Nomura economist.
Watch the full conversation here:
Edited excerpts of the interview:
Rural demand is hurting. If indeed, we have an El Nino and thereby following that, if at all a drought year, then could rural demand—which is already hurting—continue to hurt further? How bad could that be?
Sonal Varma: I think there's a lot of uncertainty right now on how this plays out. So, this is a risk we need to monitor. But, how severe an El Nino it's going to be, what is its impact, which month is going to hit, what is its impact on food production and (if) production gets hit, then will we actually see an impact on prices is difficult to predict.
You've had periods in the past of El Nino, not so bad rains or bad rains (having) less impact on production or production rate but price impact is not there. So, we are hopping over so many bridges to come to the view that El Nino is equal to high inflation and bad production and therefore, bad for rural demand.
Right now, to my mind, it's a risk. It is not a clear cut negative, given the moderation in inflation from a real income perspective—that actually at the margin is becoming a positive for rural. If you look at where amongst the growth drivers in India, the one segment that is still doing very well is this infrastructure and investment side. And to that extent, construction activity does tend to be better for rural income. So, I would say, glass is more half full actually.
The budget also helped in that because it seemed that while it was a pre-election budget, there were no freebies per se. The polity moved towards providing jobs, employment and income through spending on infrastructure. Would you reckon that it will hold true for 2023 as a year?
Sonal Varma: This strategy is basically not a short-term approach to boosting rural income, but more of a medium-term approach—either through mechanisms that improve productivity in agriculture, creating new markets for them or infrastructure construction leading to more jobs and therefore, job-driven demand rather than just one-time cash transfer.
This is a more sustainable strategy to get higher rural demand. It's also a non-inflationary way to get higher rural demand because you don't want to announce a policy that helps demand in one sector, but then leads to broader macro issues on inflation and current account. So, this is the right strategy.
I'm just trying to mix the globe and India within that—what would be the house’s view and your own view around what's happening in the U.S. because the wage growth data in the U.S. was strong until recently. Is it showing some signs of a cool-off, if at all, and could that have an impact on what the central bank does?
It is clear that there are no rate cuts for 2023 And how does that force the hand of an EM central bank like India at a point of time when growth may not necessarily be strong? Will they have the ability to go out and help? Why are some tinkering with interest rates?
Sonal Varma: So, on the U.S. side, first, the outlook has become a lot more uncertain. And the scenarios, from here I think, we need to be open to all kinds of scenarios possible.
Now, as a house, our view is that the more recent data around jobs, retail sales, etc., do suggest that the economy had more momentum than we had anticipated.
And, we did think that the recession would start in Q1 of this year, but so far, the Q1 growth numbers are also tracking positive, job growth is still positive. So, the economy has more momentum and that does suggest that there's a risk of a delayed slowdown in the economy and the momentum in inflation.
We do think that increasingly, central banks—particularly in Asia—will focus more on local factors than just global factors. Of course, what the Fed does, Its impact has to be monitored. But if you have domestic growth issues or if domestic inflation is not as big a problem as it is in the U.S., you cannot just be importing U.S. monetary policy. If we face forex issues, we have the forex reserves to basically defend the currency.
Therefore, we do think it restricts any EM central bank's hand in terms of doing anything at all to support growth for now, but there will be a policy divergence between EM central banks and I would say, particularly Asia versus what the U.S. does, going forward.
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