The Reserve Bank of India’s (RBI) macro-prudential actions may have been necessary at different points in time but have also contributed to a slowdown in credit growth, dampening economic activity and hiring, according to Chief Economic Advisor V Anantha Nageswaran.Nageswaran addressed concerns over consumption growth, a key component of economic activity, stating that while fluctuations have occurred, the slowdown cannot be attributed to a singular cause. He pointed out that before 2024, there was widespread concern about a ‘K-shaped’ recovery, particularly regarding rural India’s lagging consumption. However, he argued that these concerns have dissipated as rural consumption has shown strong performance, indicating a cyclical rather than structural issue.Nageswaran suggested that the issue of urban consumption is a mix of cyclical and structural factors. He emphasised that changes in private-sector hiring and compensation practices in the post-COVID era have played a significant role in today’s consumption trends. These changes, alongside the central bank’s credit-related actions, have influenced consumer spending patterns and economic activity.
His comments come in the backdrop of the government’s Economic Survey, which projects India’s GDP growth between 6.3% and 6.8% for FY26.Verbatim transcript: Q: The feedback that we have got from all quarters, economists and other stakeholders, is very clear that the survey has always been realistic in its growth estimates, in its growth projections and that is the feedback that is coming in this time around as well. But if I may address the overarching theme of the survey — you have used the words deregulation and regulation over 350 times in the 480-page economic survey. So, in the context of the government talking about unleashing of the animal spirits of corporate India, do we have a demand problem or do we have a regulation problem? Has regulation continued to shackle the animal spirits?Nageswaran: It does not have to be mutually exclusive, and deregulation or basically removing the fear of growth in our business enterprises has been an enduring issue over the years. While much has been done in the last 10 years or so, both at the Union government level and at a state government level, much more remains to be done. And that could itself address the demand problem because it can sort of stimulate a virtuous circle of economic activity leading to greater hiring, compensation and income growth and therefore, demand growth as well. So, they are not mutually exclusive — they are interdependent.In fact, addressing the deregulation aspect may also address the demand challenge as well — whether it is short-term or medium-term.Q: If I were to articulate the bucket list of industry asks, it is capex, consumption, and of course, the focus is on corporate India as far as the government is concerned. Let us address consumption. How concerned are you about consumption growth today? Industry is saying more needs to be done, tax relief needs to be given, consumption vouchers need to be on the table, are you worried about consumption growth?Nageswaran: The industry may have a bucket list of demands, some of which may be mutually inconsistent.
However, in terms of consumption, up to 2024 there was a lot of conversation about K-shaped recovery in India, rural India lagging behind, etc.. But now, that is suddenly out of the window because the rural India consumption story is doing quite well. So, it turned out to be cyclical and not structural in that sense.In terms of urban consumption growth, yes you may call it a quasi-cyclical, quasi-structural issue. Again, the answer is not necessarily with respect to the government, but also with respect to how things may have changed post-COVID in terms of the private sector’s hiring and compensation practices. That has also a lot to contribute to the consumption slowdown we may have experienced.We could focus on the central bank’s multiple macro-prudential actions, which were necessary at different points in time, but collectively, may also have contributed to a slowdown in credit growth, dampening economic activity and hiring.So, in that sense, yes, consumption is an important pillar of economic activity. But whether we should go all out and call it a serious structural issue, I have my doubts. I think it’s a combination of both, and an outcome of multiple developments, and not just one particular argument. But mainly, one can look at post-COVID labour market practices in the private sector, near-term credit-related actions, etc. Those are important determinants of the consumption slowdown story.Q: Let me address the other ‘C’, and that is capex. Now, once again, the government has been doing the heavy lifting, which has been acknowledged and articulated through the course of the Economic Survey as well. When you talk about the baton moving from the government to the private sector, again, I will ask you this in the context of the industry wish list — 20-25% capex growth, are those reasonable asks? Are those reasonable expectations to have, given the fact that the government has been doing record numbers as far as capex is concerned? Nageswaran: I think the slowdown in capex spending, in terms of public investments, is something that is straddling both the Union and state governments as far as FY25 is concerned. Yes, there could be a capacity constraint with respect to spending on the part of the public sector. When I say public sector, deliberately, I don’t use the word “Union government”. I’m referring to the entire public sector, which includes state governments. So, therefore, there is a need for the private sector to look at the need for ramping up investment and its implications for demand. Because ultimately, in an economy, it is the private sector that is mutually endogenous.The private sector consists of both households and enterprises. Public sector, fiscal policy, and external demand, foreign trade, both are exogenous to the system. So, the private sector can actually do a lot to stimulate demand and thereby justify its own investments, and that is where they need to focus on. Otherwise, asking the government to ramp up capital investment, lower taxes, keep interest rates low, and maintain low fiscal deficits, these are not a mutually consistent set of recommendations or asks on the part of the private sector.Q: The survey says that, yes, the government needs to continue to spend on infrastructure development, not just over the next year or five years — over the next decade — to achieve the kind of growth rates that we aspire to. But would it be fair to temper, then, the expectations of the way that we look at capex-driven growth, especially on the part of the government?Nageswaran: I think infrastructure investment, both in terms of renewals, both brownfield and greenfield, would be necessary. But again, the way we look at it, we need to, therefore, go back to the public-private partnership model and how that can be reinvigorated, because the demands on public resources from various investment angles, not just physical infrastructure, but related to energy transition, related to soft infrastructure, etc, will always be there, given our size, and that is something we need to bear in mind. And that is why how we approach this will have to change.Q: The thrust of this survey has also been on the onus of the private sector. You talk about the enlightened self-interest of the private sector to do more to stimulate jobs, to stimulate demand. I don’t want to put words in your mouth, but I want to ask you, is there a sense of frustration? Is there a sense of disappointment? You talk about the corporate sector swimming in profits, about the private sector not having lived up to its end of the bargain? I’m not putting words in your mouth. I’m asking you to comment if there is that sense of frustration and disappointment?Nageswaran: Not at all, not at all. There is no question of frustration or disappointment, because economy and economic activity is an ongoing phenomenon, and what I’m writing about is an ongoing thing. It is not something that we expected them to act within a particular timeframe, and they didn’t act, and therefore there is frustration. But what I’m writing about is valid today, will be valid five years later, will be valid even 20 years later. So, there is no question of frustration or disappointment creeping in. If you look at the survey, we do write about the fact that in post-World War II Japan, there was a compact between the government, the private sector and workers that basically made their economy transform itself into a first world country. And that is the kind of compact that we should be having in this country.We wrote about it in July as well and that is what we are expanding on at this time. So, as you correctly said, you are not putting words into my mouth and did not utter those words either. These are natural ongoing obligations on all sectors of the economy for medium-term growth. There is nothing to be frustrated or disappointed about at this point.
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