The Private-Consumption Slowdown: Gauging 2023-24 Economic Trends with DK Joshi
Navigating India's Growth: Climate, Migration, and the Path to 2025
In this Special Edition of The Core Report, financial journalist Govind Ethiraj engages with DK Joshi, Chief Economist at CRISIL, to provide a comprehensive analysis of India's economic trajectory. The discussion delves into how investment patterns have evolved since 2019-20, the pandemic’s lasting impact on GDP, and the alternative paths India’s economy could have taken. Joshi sheds light on the critical need to address skill mismatches, prioritize vocational training, and enhance workforce productivity. He examines the unprecedented dip in private consumption for 2023-24 and the complex dynamics of premiumisation affecting the mass market.
The conversation also explores the importance of updating India’s labor data through a new census, the migration of labor from agriculture to high-productivity sectors, and the economic implications of workforce mobility. Climate change perspectives take center stage as Joshi discusses India’s pragmatic approach to balancing environmental goals with affordability and security concerns. Looking ahead to 2025, he provides insights into tariff challenges, India’s strategic global positioning, the transformative role of digitalization, and an optimistic forecast for interest rates. This episode offers a thorough exploration of the forces shaping India's economic future.
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Govindraj Ethiraj: Hi and welcome to The Core Report's year-end special series, looking this time at the economy. And we're calling it Looking Backward and Looking Forward to try and understand how the economy shaped up in 2024, what are the big macro data points that have emerged, and also to see how this has or will play into 2025. To do all of that, I'm joined by DK Joshi, Chief Economist at Crisil.
DK, thank you so much for joining me.
DK Joshi: It's always a pleasure to talk to you.
Govindraj Ethiraj: Great. So, DK, I know a lot of things happened in 2024. One of the things that happened was that we did not grow the way we did, or subsequently, the way we did the previous year.
And when I say previous year, I mean the financial year 2023-2024. After that, things seem to have slowed down a little bit. But before we get into the actual numbers, give us a sense on what was happening, particularly in the period starting with the pandemic, after that, and into this year.
DK Joshi: Well, I think one of the good things that happened after the pandemic was that GDP growth surprised on the upside. Typically, I think you get GDP being revised down, revised up. This time, I think even in the last year that you were mentioning, which is 2023-2024, GDP growth got revised from close to 7%, which were the earlier estimates, to 8.2%. So, we have been used to positive surprises after the pandemic. And one of the reasons for that was the shift in the spending of the government towards infrastructure, which has a higher multiplier effect on the economy. And also, I think digitalisation was at a very fast pace. So, that also helped in some areas, particularly in the area of credit dispensation and payments, etc.
All those things also contribute to growth in some sense. So, we saw positive surprises until 2023-2024. And in 2024-2025, we saw a bit of negative surprise.
Some of the slowdown was expected because growth never moves in a straight line. It sometimes goes above the trend, sometimes below the trend. And when it goes above the trend, then I think it typically goes below the trend in the next year.
So, 2023-2024 was the year when growth was above trend and above potential. And now, I think since 2023-2024, we've seen fiscal consolidation at a faster pace. So, the deficit is reducing, which means that the fiscal push to the economy is reducing.
We also saw interest rates hike, which actually have remained higher for 21 months now. They have not changed. They haven't changed as yet.
So, that typically brings the economy down. And so, that was expected. But what happened in the second quarter, I think was that the growth slowed down much faster than expected because the spending of the government, particularly in infrastructure, slowed down remarkably, I would say, in the second quarter.
Something to do with elections, etc. also. But that's the point.
I mean, the key driver of the economy, which is investments. By the way, if I compare investments in 2023-2024 to the pre-pandemic year of 2019-20, investments are up close to 28%. GDP is up only 19% from that in real terms.
So, clearly, investments have been the driving force, and that slowed down, and public-led investments. And that actually was one of the factors, and then some weather-related factors, etc., also added up. So, you got a surprise.
So, you were supposed to slow down anyway because of tighter fiscal policy and rising interest rates, but you slowed down faster because the fiscal policy became, in some sense, more tighter. I mean, government reduced its… Government could not keep pace with the capital expenditure that it had budgeted, I mean.
Which is going to reverse, hopefully, is reversing to some extent in the second half.
Govindraj Ethiraj: Okay. I'll come to that. And I'll also come to this term, trend, that you use.
Like, what is our trend line and how we should pick up. I'll come to that. But tell us, you said that before pandemic, our GDP was actually, in terms of public spending, was higher.
Or was it higher now compared to… Can you just go over those figures again?
DK Joshi: Yeah. So, what I'm saying is, if you take the GDP for 2019 and 2020…
Govindraj Ethiraj: Yeah. And my question is really about aggregate, not the percentage number.
DK Joshi: Yeah. So, GDP is much higher. So, now the issue is, you can look at GDP.
GDP is about 19% higher than what it was then. The other way to look at it is that where would it have been without the pandemic? And I think without the pandemic, it would have been much higher than what it is today.
Because… So, what it means is that the shock that you got in 2020, 2021 to GDP, you've not fully compensated from that shock in terms of where you would have been without the shock.
Govindraj Ethiraj: Got it. So, we are 20% or 19% above 2019-2020.
DK Joshi: Yeah. And that… Yet, we are below where we should have been without the pandemic.
Govindraj Ethiraj: And where would we have been? Could we have been?
DK Joshi: I mean, it would have… I think we are about 5-6% lower than where we would have been.
Govindraj Ethiraj: Okay. And that's because of that one and a half to two years of demand slowdown.
DK Joshi: That is because we… The GDP growth was minus 5.8% in 2021. So, you need to really rebound faster.
You got a positive surprise, but that was not enough to… So, enough to completely compensate for that. That's what economists refer to as the permanent loss.
For instance, in US economy, there's no permanent loss. They gave a huge fiscal stimulus and then they suffered the result of that in terms of inflation, etc. So, we didn't give that much.
So, I think that's why… But we've done fairly well, I think, overall.
Govindraj Ethiraj: Right. And you talked about trend and you talked about normalisation and you mentioned this in the past as well. So, what does normalisation mean and how does one arrive at a normalised figure of GDP growth or economic growth?
DK Joshi: Well, I think what people do is there are various ways to look at it. One is that you look at your trend rate of growth, which is pre-pandemic. Decadal average was 6.6%. So, you managed to grow at that level, that rate, and that becomes some kind of a new trend for you.
Govindraj Ethiraj: So, that's 2009 to 19, roughly?
DK Joshi: That's right. That was the period when… That is the average rate of growth during that period.
Now, what happened after that was there was a disruption due to pandemic. Once you normalise, then you'll again reassess what the potential rate of growth is going to be and what is going to drive it. And I think our assessment is that now the potential rate of growth is around 6.7%. We can talk about what is going to cause that later. But that is… So, 6.7 would mean that that is the rate of growth which will not generate inflation. I mean, if you grow above the trend, you start pushing inflation up typically.
So, which will be a sustainable rate of growth given the current reality.
Govindraj Ethiraj: So, if we were at 6.6% in the previous decade, up to 19, and we are at 6.7% in the current, would you say current decade?
DK Joshi: Yeah, it is going to be from this year till the end of the decade. That is our forecast. So, we see the potential at 6.7%. So, that's 24 to 34? That's 24 to 31.
Govindraj Ethiraj: 31, okay. So, in optical terms, it appears that we are not growing that much compared to the past.
DK Joshi: No, you are growing fast.
Govindraj Ethiraj: I think 6.7%. I mean, in terms of what maybe, let's say we hear or we aspire like a China.
DK Joshi: I think, but there is a catch here. I mean, see, what happens is there is something called compounding. The size of the economy keeps…
You have grown at 6.2% for so many years. So, even if you sustain that, I think you will see the compounding benefits of incremental GDP happen. And I think even at 6.7%, you will see compounding benefits play out because the calculations are that if you are at 3.6 trillion right now, you will become 7 trillion by the end of this decade, which is like almost doubling, I mean, in dollar terms. So, I think that kind of thing will play out, but we need to grow much faster. But this is what we assess right now. Do you need to grow faster than this?
Of course. I mean, the countries like China have grown at 10% per annum for decades.
Govindraj Ethiraj: Right. So, if you were to assume that 6.7% is our expected rate of growth, would this mean that per capita incomes would also be at the same pace or move faster?
DK Joshi: See, per capita income depends on how the population is growing. And I think in dollar terms, I think our assessment is that per capita income right now is something around 2600 or 2700 dollars per person, which is going to become 4500 dollars per person by the end of this decade. So, it's also going to grow.
Govindraj Ethiraj: Right. Okay, and I'll come back to that.
DK Joshi: It grows typically slightly slower than the overall GDP.
Govindraj Ethiraj: Ah, okay. So, now, you talked about what are the factors that would drive growth in 2025 if it's 6.7%. So, walk us through that.
DK Joshi: Well, I think there are a couple of, one way to look at it is use the Robert Solow framework. Robert Solow was a famous economist and also a Nobel laureate. And it's a very simple framework, but it allows you to assess the drivers of growth.
So, there are two drivers of growth. One is capital and other is labour. And the third addition to that is productivity.
So, when with the same amount of labour and with the same amount of capital, you produce more, you become more efficient and become more productive. So, our assessment is that the major contribution to this growth is going to come from capital, which is going to be above 50% contribution to the 6.7% growth. The next will be productivity, which is going to increase its contribution compared to the past decade, and I'll come to that.
And labour's contribution is somewhat stagnant. So, basically, I think that's the headline number. Now, coming to it, why capital?
Well, as I was just mentioning, investments have been the fastest growing part of the GDP, and I think they've grown much faster than GDP, increased their share in GDP. Public investment till now, private is going to come in gradually over time. So, investment will remain the dominant driver.
So, capital becomes a critical driver. Then comes the productivity. Productivity, there are three drivers of productivity that we see, and not all contribute equally.
The number one driver of productivity is creation of better physical infrastructure. So, your turnaround time comes down, you move goods faster. I think all those benefits, that connectivity benefits that come from physical infrastructure will reap the benefits, and it has a higher multiplier effect.
So, that contributes to growth. Then comes the digital infrastructure. Digital is, I think you would appreciate that we moved much faster on the digital because of the pandemic, and in terms of payment systems, credit enablement, everything is becoming more faster, more efficient.
Then third driver of productivity is reforms, where I think we haven't moved much. We are getting benefits from GST. We are getting some benefits from some process reforms that we have done, and the IBC also, I think we'll gradually need to streamline more to get more benefit. So now, if you look at these three drivers of productivity, the fastest movement has been in digital.
Second fastest in infrastructure, and the slowest has been reforms. Now, the issue is, if you want to get complete benefit out of productivity, then I think there is some synergy between these three which needs to play out. So, I think what I mean is that we need to do the economic reforms much faster.
I'll just give you one example how the synergy played out in the past, and that is when you had GST, you got rid of the octroi checkpost.
Govindraj Ethiraj: So, goods move faster.
DK Joshi: Then you got better roads because you focused on widening the roads. So, that's the second benefit that comes from physical infrastructure. And when you have digitalisation, then you can move even faster if everything works and if everything is fast tagged.
So, all three come together. Otherwise, I think one can become a choking point for the other. So, we need to move faster on the...
keep the momentum on physical infrastructure and move faster on economic reforms. So, this is the driver of growth. Labour is contributing not that much because it is not able to completely participate in the growth process.
What I mean by that is that it's not that we are not growing fast enough to create jobs. Actually, we are not creating... many people are not able to plug into the job market because of the skill mismatch.
Infrastructure guys need people. We don't have enough. The hospitals require nurses and paramedics.
We don't have enough. We need plumbers and electricians. So, our education system has largely focused on the social sciences, not on the technical vocational.
I think that tilt is required just to map the skill mismatch. Otherwise, some will get higher wages. Others will have low bargaining power.
So, that is one. And then I think women's labour force participation, etc., etc. I think all those things also need to...
where we lag behind our competitors. I think they need to pull up for us to completely gain from the advantage that we have from demographics.
Govindraj Ethiraj: Right. So, let me ask a couple of questions around labour and incomes. So, one is that we've been seeing reports of labour moving back to agriculture and agriculture workforce increasing, which is counterintuitive, perhaps.
The second is, of course, incomes. Now, you talked about GDP in many components. So, I don't think we touched upon individual incomes and individual consumption or private consumption.
Where do those two or three things stand? And how do they...
DK Joshi: Well, private consumption got a shock in 23-24, which is it grew at 4%, which is the two decade low if you take the pandemic out. And I think the couple of reasons for that, one was agriculture got hit. I think the rural consumption is still a large part of the overall consumption.
So, agriculture wasn't doing well. Government spending also, consumption spending slowed down during that period. And I think that contributed to the slowdown in overall consumption.
But what was also happening was, at the same time, we also saw consumption of items which are for... which we can call luxury or high income... Premiumization.
Premiumization is the word. I think they were moving much faster. And the others were not moving that fast.
So, that, in a way, gives you a sense that not everybody's income is rising in the same way. And that is not a good thing for mass consumption increase. This year, I think the consumption numbers will look much healthier.
Actually, they already look much healthier. I think the first quarter consumption growth was 7.3%. Second quarter was 6%. Because of the low base effect and also because agriculture, I think the rural part is doing better than the urban part.
The rural part, I think the wages are also moving slightly better. The Awas Yojana benefits the rural economy more than it benefits the urban. And agriculture has, I mean, all of a sudden done.
I think the Kharif production has been good. It's reflected in the rice stocks, etc. I think which are doing quite well.
Some parts of agriculture haven't done well. But overall, I think the rural part is doing well. Now, urban suffers more because, one, they get the discretionary spending crunch.
Because food is such a large part. I mean, if food inflation is high, vegetable inflation is high, your ability to spend on other things definitely reduces. So that is one very clear thing that the food inflation is now still, after coming down, it's still 9%.
So that is one. Then the tightening of interest rates and also credit lending norms, that also, I think, there was a very swift increase in credit and that actually, it was moving too fast. So it had to, I think, slow down.
That also plays into the urban economy. And then I think these factors have, and wage growth in urban India has not been that great comparatively compared to the rural. So I think urban is much more crunched this year than rural.
Last year, it was the other thing. Apart from the fact that the premiumization is there and I think you need So I'm going to come back to that labour part in a second.
Govindraj Ethiraj: But I have a slightly broad question here. So when we look at, and this is for someone who's trying to understand, let's say, the Indian economy. When you look at all these numbers, we look at GDP growth, we look at aggregate GDP, we look at, let's say, company performance, we look at tax collected, we don't know whether the entire 1.4 billion people who live in this country are benefiting or not. We know that the economy is doing well and may continue to do well. So how do we arrive at some kind of determination for that? I mean, who is really benefiting?
DK Joshi: So I think one way, simple way to do it is, it's not simple, it's complicated, is to look at what is the average consumption basket of a poor person, middle class, and the higher income and see what is happening to, where is the demand growing? Where is your way, what product you're selling more? That will give you a sense of what is happening.
But as I said, it's not so easy because getting a precise consumption basket is, you know from directionally that the poor will consume more food items, the rich, the fair item will have a very low. So I think that is one way to look at, look, I mean, so that's how we try to assess that.
Govindraj Ethiraj: Because we are saying now that, or this is the presiding view, that the composition or the contribution of food in the entire basket, the household basket is reducing and other factors like education are going up, which is good, but that could only reflect the situation for part of the economy and not the whole economy.
DK Joshi: Yeah, I think see we don't, unless we measure it, it's difficult to monitor it. I mean, you have to measure it properly and I think report. I would generally agree with you that I think that that is the case and the upper income classes have benefited more than the lower income classes and that is visible in the consumption graph.
Govindraj Ethiraj: So let's, if we look ahead at 2025 and one of the questions that I did want to ask you was about data capture. So what are the data points that you feel we could work on, improve the quality of sourcing and then maybe, so that you can, you know, in a way do better analysis and outcome?
DK Joshi: The first thing is what you just mentioned about, I mean, the food basket. I think the, you need to update your base. It is 11, 12 years to, and the way things are changing, I would say that you have to update your base every five years because things are moving fast.
You will have AI and many other things which have non-linear.
Govindraj Ethiraj: Is that what other countries do as well?
DK Joshi: Some do it, some do it at, yeah, dip, dip, dip. It's not the same thing in every country. Now this time it got delayed because we got a disruption.
So you need a normal year for a base. You cannot choose an abnormal year. So I think you're still in search of normal year and probably it will get changed to 2022, 23 or there's a committee to do that.
So first is you change the base. Then I think the other way to look at the economy is to look at the GDP inflation. These are aggregate measures, but there is a lot of micro information also available, which is through surveys, et cetera.
I think you need to embolden them further. I think even RBI does consumption, business expectation, inflation expectation. I think all of them, for instance, RBI survey reflects that the urban consumer sentiment is weak.
So it is coming out of that. So you have to use data, you have to use current surveys and I think that's how you'll be able to come closer to reality. But the point is that things are moving so fast.
I think so you'll need to look at also the high frequency indicators. I think analyse them more now to get to what is happening in the economy because you're generating so much past data, whether it is through credit or through GST. I think all these data need to be put to use to assess the economic situation.
Govindraj Ethiraj: And is GST something that many economists, including yourself, have been saying that needs to be... I think it's a very rich source of data. Not dismantled, but opened up, distributed.
DK Joshi: Yeah, if it is done, then you will get a regional pattern of activity and many other things can come out of that. But I think, I'm sure it will, we'll have access to that at some point, I think going ahead. And that will allow you to get a more nuanced feel of what's happening and also regional feel of what's happening.
Govindraj Ethiraj: Right. And what about factors like census, which we have also got delayed?
DK Joshi: Census is needed. I mean, census is, I think census, we should be doing, I think, and probably it's being conducted. We should...
It's important, I think, that we do these things in time.
Govindraj Ethiraj: And what are the gaps that you feel today you're not able to fill because you don't have, let's say, latest census data? The last one we did was 2011.
DK Joshi: Well, I think one is the population. I mean, you were just... Just 1.4. I need a more precise...
Because once you have the census, it allows you to project state-level population, which government itself does, by the way. I think so. All those projections are very useful.
So it's a per capita income. It comes from how many persons, not at the aggregate level, but also at the state level, at regional level, at the district level. I think you need a sense of how that is moving.
And I think one way to do it is to keep updating it at regular intervals.
Govindraj Ethiraj: So if I were to come back to labour, what are you seeing there? Because, again, most of the reporting that we in media do tends to focus on what we get in our hands, which could be more to do with organised sector, businesses, companies, and so on. You know, the trend, for example, that labour has gone back to the farm to some extent.
Now it may not be a big trend, but it is a reversal nevertheless. So, is that something that you're thinking about in any way?
DK Joshi: Well, I think typically we should have labour move out of the farms. Even in farms, by the way, I think not all income comes from agriculture. I think they do, even if they're going, moving back to agriculture or rural, they may be doing some work here and there because for 50%, more than 50% of their income is non-agriculture income.
So that, so moving back to agriculture doesn't mean that they're completely dependent. They have started tilling the land. So that is one, but the movement should be the other way around because I think for an economy to grow from agriculture to the low productivity activity, you need to move people from low productivity to high productivity.
That's how it historically happened, whether it is manufacturing or services. These are more productive than agriculture. There is a lot of scope in agriculture, but we have too many people.
Agriculture, the size of the farm is becoming smaller and smaller. I think so, also what is happening along with that is I think the agriculture labour is not going back to their own state. I think I know instances where people from North, from Bihar, even from West Bengal, they're going to places like Kerala for doing work.
I mean, and also to other parts of South India. So there is already a movement. I mean, it is happening.
It's not that they're going back to your own village. It's also going to, so this migration is also taking place. I think depending on the need.
I mean, because those are ageing parts. These are young guys and those are ageing. How southern part is ageing faster than the northern part.
Govindraj Ethiraj: So that also brings me to the point about the, I don't think intangible is not the word because these are tangibles, factors like climate and you touched upon a key one which is migration. And you mean migration within the country and there's also cross-border migration. How do you see these factors playing out and in some detail in the year to come?
DK Joshi: Yeah, absolutely. I think this is a very critical issue. I think as an economist, I think a decade back I wouldn't have looked at climate, but now it has to be a part of the toolkit to analyse.
So there are two ways to look at it. One is that how vulnerable you are. We are very vulnerable.
I think the various studies have shown that India is in a vulnerable spot as far as the climate shifts are concerned.
Govindraj Ethiraj: And you're saying that because of food?
DK Joshi: No, no. It's general vulnerability to shocks like heat waves.
Govindraj Ethiraj: As people we are vulnerable.
DK Joshi: Yeah, yeah. As a country we are more vulnerable. We'll get more shocks than other parts of the world.
So that is one. And we've seen that play out. 23 was the second hottest year in memory or in history.
Govindraj Ethiraj: And 24 is the second or the hottest.
DK Joshi: It could be the hottest. So now there are two ways to look at it. Look at climate.
One is to look at the mitigation measures. So you want to reduce your carbon footprint which is green transition, etc. Or net zero by 2050, 2070.
So that's one part of the game and how you adjust to the climate change. Second part is adapt. I mean, how do you...
If you are getting more shocks, I think this is happening right now. And what you do for the energy transition is going to pay off long time. I mean, it's over a long period of time.
It's necessary but it's not going to pay off immediately. What you need is adaptation. So adaptation measure is the second part.
Now let's think about how this works for a developing country like India. There is in economics, we have something called an energy dilemma. So on one end of the triangle, you have energy security.
On the other, you have affordability. And the third is transition. Only when you have energy security and affordability in your country, only then you start focussing on energy transition.
We have seen it play out in the current milieu. Russia-Ukraine war, immediately prices of energy went up, energy shortage. And what it did to Europe, we all know.
I mean, what a lack of energy security and affordability can do. The government got pulled up and also, I think, look at Germany. I mean, the economic growth is so weak in that country.
Govindraj Ethiraj: It's dependent on cheap Russian gas.
DK Joshi: Absolutely. So for India, I think energy security is critical because we are in a high growth phase. And you are also trying to focus on manufacturing and infrastructure which are energy intensive.
Cement production is energy intensive. Steel production is energy intensive. And so, I think the point I'm trying to make is that from a transition perspective, I think we'll remain focused on security and affordability and also keep doing the transition or emission reduction over a period of time.
If more technology becomes available, as happened with solar, we'll speed that up. But otherwise, I think the focus will remain on... Because you need energy.
Without energy, you cannot grow. So that is it. So that's one part.
And that is how we have committed to 2017, not 2050. We are now coming to the adaptability part. That is right here and now.
I mean, we've seen RBI is not cutting rate. It's only food inflation. There are several factors that can drive food inflation, but one of them is also climate because agriculture follows the laws of nature.
If heat means the grains will get shrivelled, vegetables will spoil much quickly if you don't have refrigeration. All those things did play out for vegetables. That's why we skipped the decline in vegetable prices in winter last year.
And this year also, I think we are just beginning to see some decline. Hopefully, it will last. So the adaptability becomes important.
So look at the connection. It's going right up to the central bank's ability to add rates. Second, I think, is what we observed was microfinance which gave loans to the poor.
And there, what happened during the heat wave was people couldn't work because more than 50% of India works in the open. You can't work in that heat. And the collection agents could not collect.
So the delinquencies of the microfinance companies partly are also due to the fact that there was a hit from... And this is going to be a regular feature. So how...
And then, if sea level is rising, you'll have to embankment. So I think this is going to be a key area where I think we will have investments and so on and so forth happening to make yourself resilient, whether it is weather-resilient crops or it is reducing the wastage by cold chain which are spread far and wide.
Govindraj Ethiraj: Or not enough cold chain, I think, like in the case of America.
DK Joshi: Because of nausea. And then, maybe food processing to smoothen the shocks. So I think that is going to become a more critical and a binding constraint from a climate perspective, from a policy perspective, and will require more funds to be allocated to these.
And the energy transition will continue if... I think the way we are doing, we are capitalising on existing technology which is your solar, etc. But the other part is that, okay, you carbon capture, green hydrogen.
These are things which will... And then deep decarbonisation in industry. These are going to be, I think, back-ended.
We won't do it as quickly as Europe and others do it because we can't afford it.
Govindraj Ethiraj: Right. So if I were to quickly pose a question on climate and migration, because they are linked too. Is that something that the government has to think about now?
I mean, you talked about some migration. It may not be necessarily induced by climate, but it is migration nevertheless. But we've definitely seen migration at a transnational level, globally, induced by climate.
Yeah. So is that something that can change the fundamental dynamics of, you know, labour, let's say, mobility, demand? Yeah.
Or is it too early to start?
DK Joshi: No, no. But I think if... I haven't studied this, but I have observed that if you label different parts of India, they are not equally vulnerable.
Some parts are more vulnerable than others. So there... And then, even industry, while setting up a plant, will look at whether it is climatically vulnerable or not because that can have an impact on the evaluation if the climate risk rises.
Govindraj Ethiraj: Yeah. So it's already... Or the rate at which you will get a loan from the bank, disaster resilience and...
DK Joshi: Absolutely. So I think it is getting into the psyche and I think it's early stages, but we need to watch this space.
Govindraj Ethiraj: Right. So let me come back to a broad sense of 2025. We are, let's say, going in a somewhat stable, at least internally, external is...
And we've not touched upon that and that's the last point I want to talk about. It's going to be a different world. So as we go into 2025, the one, maybe, threat that's hanging over many countries is the threat of tariffs.
Yes. And whether or not the United States under Donald Trump will impose tariffs and that could affect many countries. And countries are already beginning to talk about retaliatory measures.
So, between internal and external, how are you weighing and looking at 2025? I mean, what are the internal, if you were to do an internal SWOT analysis and an external SWOT analysis?
DK Joshi: See, internally we are, I would say, reasonably well-placed because I think the infrastructure, investment and digitalisation will help us. Now, I'm not talking about how well the consumption is distributed or how well the productivity is distributed in the economy, but aggregate level, I think, we believe, we'll grow at 6.7% in 2025-26. The external resilience is there.
Forex reserves are there and also the current account deficit forecasts are in the safe zone. You don't depend on the mercy of the foreigners to bail you out. If you have a high current account deficit, you become vulnerable.
So that is one. Fiscal consolidation is continuing, I think, at whatever pace. But it is, I think it's, so that is also a positive.
So I think there are several positives and then hopefully interest rates will start coming down. That will also support the economy with a lag. so I think internally there are not too many problems at the aggregate macro indicators which foreign investors would typically look at.
But I think there is a spillover risk that comes from what is happening externally. That is, that is very much there. And you mentioned tariffs.
So now what happens is when you have this kind of a scenario where there is uncertainty, it becomes very difficult to make forecasts. It becomes very difficult to give point estimates. You have to work with ranges.
The fluctuation around any point estimate will be much higher. I think, so let me put it in those, in those terms. So, which means the forecasts become less reliable.
Let me give you an example. I mean, S&P did a, did a simulation of, of, if US imposes 10%, 25% If the weighted average tariff is 25% of, of, of imports from China, it's currently 14%, it goes up to 25%. What happens to the US economy?
US growth doesn't suffer that much, but their, their inflation goes up.
Govindraj Ethiraj: Yeah.
DK Joshi: And when inflation goes up, what does the central bank do? It will not be as aggressive with the rate cuts. So, now the new forecast is that the, the, the Fed will cut interest rates 50 basis points less than what was expected in the, so there, it immediately had an impact.
Now the issue is what happens to China? I'll come to India also. Now China's growth will go down because their internal consumption is weak and they're only surviving or I think exports is a dominant driver of growth.
Inflation will come down because they'll have, they'll have excess capacity. Prices will, they're already in a deflationary, close to the deflationary territory. They will, they'll cut interest rates.
Just this, the one, one stimuli and now issue is what happens to India? What should it be watching out for? Now, if there is deflation in China, its goods will become, goods will become cheaper.
So you'll have, in India, if India is growing, then you will import more and you will import at lower prices. So, your imports will definitely go up and the competitiveness of domestic products will go down vis-a-vis whether it is steel or whatever it is, I think, which we are importing from them. So, India will also get impacted that way.
The other way to look at it is okay. How is, where are we exporting to? So, I just spoke about imports.
Over the last, yeah, over the last few years, our, our exports to advanced countries have risen, exports to emerging markets have gone down.
Govindraj Ethiraj: And, I remember you were the first to point out the trend.
DK Joshi: Yeah, yeah. So now, we again looked at it. Same, same trend, trend playing out.
So, if US remains strong, probably they'll keep importing from, from us as well. But, here the, again, the other wrinkle, we also run a trade surplus with US. So, how is Mr. Trump going to look at it?
Last time, the Harley Davidson was the, the thing that was getting pointed out again and again. So, there is, why I gave this example was to tell you that it's a very complex thing. I've only, I've not factored in what the retaliatory measure from China would be to US.
That will also have spillover effects. So, it's a very, very complicated scenario. I think then, if I were to add two other things, I mean, you mentioned tariffs, but I can add one or two more things.
One is, after Mr. Trump came, the cryptocurrency is, Bitcoin is again roaring. And if there is, if it becomes legitimate, even if it is regulated, then it will have impact on central banks also because there's an alternate currency floating around. And so, so that is also, I think one, one area that, that one might have to look at, I think, from a longer term perspective, which could have, which is, which you can say that it, I think it's attributed to Mr. Trump's coming. And on energy, things could change. The, the, I think.
Govindraj Ethiraj: And the increased production prices can only crash.
DK Joshi: prices will crash, but the energy transition, I think, to me, he, Mr. Trump kind of favours that, okay, you drill, baby drill, but we'll capture the carbon out of there. So, which means carbon capture and other, these guys will get more, more, more active, I mean, so to say. The technology is still not evolved to that level.
So, it can have a lot of, how does this impact us? I mean, already you saw after, I think, Mr. Trump was elected, immediately some of the solar guys who were exporting to US, what happened to their, so there, the, the, the, the confidence in that industry actually went down a little bit. So, I think many, many things can, can play out.
I think internally we need to watch for climate because we've seen very high food inflation for three years now. Contribution of food inflation is only rising over the last three, four years. We need to watch out for, for, for keeping the capex momentum going because private sector in an uncertain environment private sector will always be cautious whether they are healthy, cash bean already.
It's been healthy balance sheets, cash, which it's, it's a potential, I mean, that you can do. But, in this environment, you need more, I think, so domestically we'll have to create more policy uncertainty, more ease of doing business to fight what is, some of the macros are already good, which is a very good thing to have at this juncture.
Govindraj Ethiraj: Right, and that's a very useful task, set of tasks for the policy makers to focus on. Yeah. DK, thank you so much for joining me.
DK Joshi: Pleasure.
