After presenting the Economic Survey for FY23, chief economic advisor (CEA) V Anantha Nageswaran exuded confidence that private capex will show noticeable improvement in FY24 and asserted that elevated interest rates are unlikely to deter companies from investing. In an interview with FE’s Banikinkar Pattanayak and E Kumar Sharma, Nageswaran discounted undue fears of fiscal deficit and elevated debt burden, and stressed the need for peristing with reforms amid growing external headwinds. Edited excerpts:
On the Survey’s FY24 growth projection of 6.5% being higher than IMF’s
When it comes to GDP forecasts, these are all within the relam of statistical deviations. The IMF has forecast a growth rate of 6.1% for India for FY24, some other agencies have predicted higher growth (The World Bank has pegged it at 6.6%). We have also said that with the baseline growth rate of 6.5%, downside risks are dominating. I don’t think in an estimate like GDP, which can be subject to so many extraneous circusmtances, we should be worried about the difference of a few basis points.
On expected further pick-up in private investments
In ten out of ten sectors that we analysed, based on quarterly earnings data of companies, the private capex in the first half of FY23 was running higher than a year before. So, we feel this trend will continue (in FY24 as well).
On fixed investment rate returning to as much as 33% of GDP
The gross fixed capital formation today stands at about 30% of GDP. It suffered in the last decade because of the balance sheet stress, and after this was fixed in the financial and corporate sectors, we faced multiple shocks — the pandemic, commodity price shock, interest rate increases, etc. My sense is that in the remainder of the decade, both the capital formation and credit cycle will look up. Barring global uncertainities, we do expect that from the coming financial year itself, capital formation by the private sector will start to show noticeable improvement. It is difficult to pinpoint a number but the direction is expected to be better than the previous years.
On the theme of reforms
While reforms before 2014 addressed product and capital markets, reforms since then have focussed on enhancing the ease of living and doing business to improve economic efficiency. This is a continuous theme. Social inclusion and inclusive growth is also a late motif…. Making sure the households or businesses are able to operate in a manner that is as hassle-free as possible should remain an enduring reform theme in the coming years.
On fiscal deficit remaining almost double the usual comfort levels
I am not worried. Compared to the period between 2005 and 2021, public debt in India has gone up at a far lower pace than what has happened in several other countries. And in the last three to four years, we have had to naturally increase debt and deficit ratios because the denominator went down and the numerator had to be ramped up because of the pandemic response. We have also shown that if the nominal GDP growth runs at about 10% per annum on an average for a few more years, then the debt and deficit ratios will come down meaningfully.
On reforms in factors of production like land, labour and capital.
These are areas that are currently in the hands of both the Union and state governments. Many state governments have been taking action. For example, the Labour Codes are at an advanced stage of implementation and states are also pursuing other reforms. These are in the area of political economy, they are not same as the financial sector or external sector liberalisation of the 1990s. So, these things will take some time.
On likely easing of interest rates in FY24 to spur growth
I would leave it to the Reserve Bank of India to decide.
On cost of borrowing
The real policy rates are not too high compared to historical averages and interest rate cycles do go up and down.
On whether high interest rates will dampen private investment
I don’t think interest rates are a deterent. If you look at the Indian as well as the world economy, interest rates don’t figure as an important determinant as much as we think they are. Companies, instead, look at the demand outlook more seriously.
On expected investment rate over the next two years
In the last decade, investment rates were held up because of balance sheet repair and the same thing happened in the first decade of the millennium. Once they were repaired, global conditions became friendlier and investment rates picked up. Similarly, after the balance sheets were repaired (in recent years), the pandemic and high commodity prices followed. Now if they are out of the way, then investment rates will automatically rise.
On enablers to push up the savings rate
Savings rate rises when incomes rise and incomes rise when economic activity picks up and that is what we are expecting.