'We see a risk of populist bias in Modi 3.0,’ says Tanvee Gupta Jain

Prime Minister Narendra Modi’s third term will see broad continuity in economic policies from his previous two terms. However, there is a chance of a populist bent targeting the lower income strata, said Tanvee Gupta Jain, Chief India Economist at UBS Securities India.

In an interview with DH’s Arup Roychoudhury, Gupta Jain also said that tougher reforms could be more difficult to push through, and that the gap between GDP growth and household consumption growth remains a dichotomy.

Excerpts:

How will a coalition government, after two terms of absolute majority, shape economic policymaking?

I would say the bulk of the market participants were pricing in a full majority for the BJP. So, it is definitely a disappointing outcome compared to where the market was. But from a macro point of view, there is still political stability. We expect continuity in the policy agenda. The difference between the previous two terms and now is two things. We see a risk of populist bias in the third term, mainly targeted towards the lower-income strata. The second is that while I don’t see a change in economic policy dynamics, tougher reforms could get pushed further out. The political outcome suggests weak sentiment at the bottom end of the income pyramid. When I look at the GDP growth numbers, India’s growth does remain resilient. But if I look at the break-up, there is a dichotomy between household consumption growing at 4% and real GDP growing at more than 8%.

We have been highlighting that India is seeing a K-shaped recovery, with the affluent premium segment doing pretty well, but the demand for entry-level mass markets remains muted. The key upcoming announcement is the Union Budget. While I expect the government to retain the 5.1% fiscal deficit target, it did well in the form of the record dividend from the Reserve Bank of India. There is fiscal leeway available for the fiscal consolidation roadmap, but it still increases populist spending to support consumption for the lower income strata. 

With the RBI dividend, is there a chance that the Centre can reduce the fiscal deficit target in the full budget compared to the interim budget while still increasing allocations?

Yes, there is a chance to show a deficit closer to 5% or even 4.9% of the GDP and still increase the populist bias. The sectors where we are expecting an increase in populist spending are rural schemes and some income tax rationalisation for the lower-income strata. Affordable housing could see some push, and I do expect some kind of cash transfer. 

But I think what really matters from a growth perspective is whether the thrust on public capital expenditure remains or not, because as of now, the capex recovery is largely led by the government capex, and we are yet to see the private corporate capex recover in a broad-based way.

Why is a K-shaped recovery still happening even four years after the pandemic?

I think that is largely because of a difference in the perceived income levels between the lower-income strata and the premium-income strata. There was income continuity at the top of India’s income pyramid during the pandemic versus the bottom class, and there was limited fiscal support for vulnerable sections of society, which kind of amplified the gap. Second, the improved access to consumer credit. When you look at the data, you realise that a bulk of the incremental credit has shifted towards consumption or consumer credit and services credit; it has yet to flow in a meaningful way towards the industrial sector because the demand is not yet coming from the larger corporates. Access to credit is easier at the upper end than at the lower end. Third, we are seeing that household savings are low, partly because of weaker incomes or a higher tendency to consume.

What can be done to revive consumption?

The best way to broaden consumption is to have a capex cycle, because in India, capex creates jobs, people earn well, and they consume more. That leads to virtuous growth. What we’re seeing is that consumption is muted. Capacity utilisation levels have been stuck at 75%. 

Two things should happen now: First, the urban mass market demand could get some support from the upcoming budget, and second, a better monsoon would bode well for rural consumption. We do expect some removal of export bans on agricultural commodities as inflation eases. At the same time, we expect the premium segment to continue to do well. So that K-shaped gap that we’re seeing should narrow, but it is still going to remain. We do expect a recovery of household consumption towards 5%.

What are your India GDP and inflation forecasts for FY25?

We have an above-consensus GDP growth forecast. The consensus is 6.8%, while we are at 7%. Our forecast has been unchanged for the last three months. The RBI’s GDP forecast is above ours, at 7.2%. Our full-year inflation forecast is 4.5%. When I look at my monthly inflation trajectory, it shows me that inflation could surprise on the downside. But I will wait for two things. One is what sort of balance the upcoming budget makes in consumption versus capex, and the second is how the monsoon impacts food inflation.

Do you see any headwinds?

In terms of headwinds, there are three. One is a harder global growth environment, especially in the context of the upcoming US elections. The second is oil prices. While India’s ability to sustain oil prices has gone much higher, we are still vulnerable to energy shocks with oil, as we are still importing 87% of our oil requirements. Third, while there is still political continuity, in case there is any kind of disruption on that front, which is always a possibility with a coalition government, it is something we will have to watch out for.