India needs sector-focused demand stimulus, not income-tax cut: Suvodeep Rakshit

With September quarter GDP print widely expected to hit a new low, Suvodeep Rakshit, Economist at Kotak Institutional Equities, says the current slowdown seems to have accumulated over the past few years and it is not going to go away in a hurry. Excerpts from an interview with ETNOW.

ET Now: What are you making of the low GDP growth projections? Does this seem like a blip, or is it the beginning of a prolonged slowdown?

Suvodeep Rakshit: It depends on what we call a slowdown, what is our projection of potential growth or expected growth for the long term. India has always had her potential growth somewhere close to around 8 per cent, if not higher. But given the current slowdown, and it is not a recent one in our view, it seems to have accumulated over the past few years. The kind of fundamentals or the kind of growth we have had is reflection of the slowdown we are having right now. In that sense, it is a structural slowdown, but that does not mean a 4 per cent or a 5 per cent kind of growth is going to continue forever. That is certainly not the case.


Typically, it is a small cycle in which the growth path is moving along. So, even though we are reaching a trough zone right now, probably closer to 4.5 per cent this quarter, the next quarter may be slightly better. What we should take away from these numbers is that the kind of growth we have had over the past few years in terms of leveraged consumption or lower savings, financing and income growth, all these macro-fundamentals reflected a slowdown, which have resulted in the demand slowdown over the past few quarters, and possibly, in the next few quarters.

ET Now: Do you expect any kind of booster to come in from the late monsoon on the agriculture side? Do you expect the government to announce further stimulus, or at least go for more spending?

Suvodeep Rakshit: I am not too hopeful on the agricultural front, because there has been some disruption in crops due to the late monsoon or the untimely rains. Probably, the rabi season will be better, given the post-monsoon reservoir storage. But that benefit may come only in fourth quarter, or first quarter of FY21. Immediately, I do not see much of agricultural growth coming. If anything, there is a slight chance of a negative impact from the kind of rainfalls we have seen.

Looking at the growth profile, it is important to note that manufacturing continues to remain weak. There, we have not seen much pickup in terms of growth rate, though there was some expansion in certain sectors due to the festive season. Having said that, I go back to the original statement that I made about the demand-side issues that we have been seeing on a structural basis. There are various ways to deal with it. The path we have been envisaging in terms of government reaction is some kind of demand stimulus, which should be more focussed on which sectors you are trying to address. We think rural stimulus or spending on rural infrastructure and rural income is something that should be the focus area, rather than a broad-brush income-tax cut. That has also to do with the marginal propensity to consume that we see among certain income earners, which needs to be factored in while you are prescribing a demand stimulus.

Overall, even though there is a demand slowdown from a long-term perspective, when we talk about potential growth of the economy, it is important to note that it is not just consumption that can drive growth going forward. There is a host of other measures that the government has been working on to enable investment demand or investment expenditure, especially by the private sector, some of which we have already seen come through. Some other measures are still in the works in the legislative agenda that we are seeing very recently, say for example the labour laws. The corporate tax cut will have some benefit over the medium term, and that is the kind of growth you would ideally want to target, as it is more sustainable in the medium term rather than consumption expenditure fuelled by a short-term booster.

ET Now: Economists in an ETNOW Poll pointed out to a bigger problem with the industry growth, and they are expecting that figure to shrink to just about 1 per cent in Q2. When do you see a revival in industry as a segment?

Suvodeep Rakshit: I look at the industry segment as a reflection of what the demand sentiment looks like, which basically means if the consumer has spent his way through over the past few years, there will be a pause in consumption expenditure, which is what we are seeing in the last couple of quarters. We have been seeing a steady slowdown in consumption expenditure and the industry’s reaction to that.

Sectors that have slowed down more significantly than others have mostly to do with high-ticket items, which also have an element of leverage consumption in it. This means, credit channels through the banking sector or NBFCs have to clear up, but that will take its own time. Once that clears up and banks and financial institutions, in general, are ready to take a higher degree of risk in lending and reaching out to a wider set of customers, leverage consumption would come back in premium goods. But for that, you need to let the current slowdown pass, which will also let consumers build in some savings, which they have depleted over the past few years. Then, they will come back to the market and get back to leverage consumption.