Sengupta attributes this projection to two key factors: fiscal consolidation and lingering macro-prudential tightening by the Reserve Bank of India (RBI).
The government remains steadfast in its fiscal consolidation path, likely targeting a mid-4% fiscal deficit by FY26. This continued tightening will act as a drag on growth, Sengupta explained.
On the monetary side, he noted that the RBI’s tightening of macro-prudential norms, particularly in consumer credit, has led to a slowdown in credit growth. “It’s difficult to imagine a quick turnaround in credit growth over the next quarter or so,” he added.
While he acknowledged some recovery in private capex could occur by the second half of FY26, Sengupta cautioned against expecting a significant net export boost or a material departure from current growth trends.
However, broader-based private capex could serve as an upside risk to their growth forecast.
This is the verbatim transcript of the interview.
Q: Before we put our toes into 2025 we have the GDP number coming on November 29. What is your sense of the second half? Your forecast for FY25 is a bit sober at only 6.4% so you are not expecting much of a pickup in the second half?
A: No, we are not expecting much of a pickup in the second half. The usual suspects will be the government expenditure coming back; capex has been low in the first half of the year, and some of that will come back. But we are in the middle of a cyclical slowdown, mainly due to overall fiscal tightening, which will continue into calendar 2025 and the macro-prudential tightening that you have seen from the RBI on consumer loans, and therefore, we are baking in a 6.4%. We have been there for a long time. We shaved, just a tad bit, by 10 basis points in our outlook, but we have been at 6.5% for a very long time now, almost more than three months for FY25.
Q: This is the exact opposite of what the Reserve Bank of India (RBI) has given us to understand even in the latest bulletin. They have shaved off the second quarter by a bit to 6.7 or thereabouts. But they are still sticking with 7% plus overall growth, which means for them, the second half is better. For you, it looks like the second half is going to be 6.3% or so, right?
A: That is right. So, our point is that you will get the rebound from government capex, but consumption relatively remains slow and it is difficult to imagine private capex picking up significantly over the next two quarters, or maybe three quarters, given the amount of uncertainty that is there in the world today. So once Q1 of the calendar year next passes and we have more clarity, possibly on tariffs and US policy, that is when we can start baking in some kind of a capex recovery on the private side and therefore we remain at a 6.4% year over year (YoY) for FY25.
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Q: Coming to FY26, I won’t take calendar 2025 since in India we all think fiscal. Your FY26 is 6.35. Don’t you expect that we have several things going for us, excellent monsoons and therefore possible consumption pickup? The fact that we could be beneficiaries of high tariffs on China and people migrating out of China; producers as well strong government, ability to take strong calls. Won’t all this add up to something better in FY26?
A: Firstly, 6.3% growth is a very solid growth print in this world of uncertainty in our view. India’s trend growth is around 6.5%; maybe a tad higher, and therefore this slowdown, in our view, is just to pullback towards the trend.
Two things are broadly going on in the domestic economy. One, once you have the second half of FY25 capex rebound, you are again going back to the fiscal consolidation path of the central government. We do not think there will be a departure in that. They have been unwavering in terms of that fiscal consolidation target, probably getting towards 4% in a couple of years, which means that you can expect a mid-4 kind of target into FY26 for the fiscal deficit. Therefore, the fiscal will remain a drag.
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Secondly, there is no respite right now from the tightening of the macro-prudential norms from the RBI. It happened a year back. You have seen the slowdown in credit growth. It’s difficult to imagine that that will turn around very quickly over the next quarter or so. We are baking in some recovery in the second half of FY26 in terms of credit. And then, if you look at the world; again, very difficult to imagine the net export boost from where you already are. Our current account deficit is tracking around early 1% of GDP; it is anywhere between 1% and 1.2% of GDP and it is difficult to again imagine getting a material net export boost.
Therefore, from FY25 to FY26 we have not been able to see what will be boosting growth towards, let’s say 7% or so. The caveat I will just point out is that if there is a material improvement in the private capex cycle, and it becomes broader-based, rather than more concentrated, that will remain an upside risk to our growth view.
Q. Let me first discuss the upside risk. The Chinese experience was when the demographic dividend hits, it is a huge inflection point. They did double digits for many years between 1991 and 2007. Do you think India won’t make it to 7 to 8%?
A. A 7-8% is a pretty high trend growth to think about. Our estimates from the supply side has been in the region of 6.5%, maybe a push towards 7% if you do the right things on the supply side, especially on infrastructure development and so on.
Now, because you’re pointing out the demographic inflation point, in terms of consumption, we are looking at it in three layers. The upper end of the consumption pyramid like air traffic growth, large hotels, etc. are still doing okay. It’s the bottom end of the urban, which is dragging, possibly from the retail credit slowdown. And on rural, we are feeling quite confident about a rural recovery after a very long time, after almost two or three years, we think that production is likely going to be okay.
That is why we have a view that food inflation will come down, and that will boost real incomes in the rural segment. And you’re already seeing a little bit of transfer payments happening at the state government level, not so much the central government, with multiple states making transfer payments, especially towards women, which should boost rural incomes a little bit.
Q. Let’s come to the downside fears. That’s largely exactly the point you mentioned. Since a whole host of states are into revenue expenditure because of transfer incomes, do you expect that we could see some significant downside in the rate of growth of government capex? As you point out, private capex is not gangbusters, but government capex, which was gangbusters, may slow considerably because the states won’t be able to put matching funds?
A. On government capex, there are two things happening. One, the fiscal consolidation of the central government has meant that the nominal growth rate that you’re having on capital expenditure is slowing down now. We think next year it’s going to be in line with nominal GDP growth rate. The year after, possibly you’re going to grow in mid-single digits if you’re really going to 4% of GDP on the fiscal deficit.
On the state capex, I would agree with you. If there’s a shift that is happening, and we are estimating around 0.5% of GDP already for all states combined until now shifting towards transfer payments. If you hold the fiscal deficit constant, then this money has to come from somewhere. And undoubtedly, we think that there’ll be some reallocation happening from capex, and maybe some from other current expenditure.
For capex to continue, you still have a lot of savings, from insurance, pension funds, PF and so on, which is anchoring the long end of the sovereign yield curve. It’s just about channelising that money, which is seeking duration into duration assets like infrastructure. So you need quasi-sovereign entities to come out and issue to carry on the infrastructure boost in India, if the central government is going to take a step back.
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