Early monsoon, low inflation and tax cuts to aid consumption revival: Sajjid Chinoy

"In the second half, we think that quadruples to close to 17% or 18%. So, you have actually had a tale of two halves where in the second half we have had the benefit of a stronger fiscal impulse, stronger agricultural production, and that should drive gva higher, now that is the first part. There is also a second element to GDP which is that subsidies this year were frontloaded in the first three quarters and in the fourth quarter we expect subsidies to be meaningfully lower than the same quarter the previous year," says Sajjid Chinoy, JPMorgan


The second half of the previous fiscal has shown some signs of improvement, even high frequency indicators have performed much better in H2 versus H1. Tell me what are your expectations with regards to the GDP data for the quarter?
Sajjid Chinoy: GDP this evening could surprise to the upside. I know the market consensus is closer to about 6.7, 6.8. We actually think GDP could be closer to 7.5% which was implicitly in the advanced estimates that the government put out a couple of months ago. Now, there are two points to this. You will see an acceleration in GVA, gross value add. We had 6.2% last quarter. We think that goes up to about 6.7 or 6.8 GVA itself and there are two components to this. We have had a much stronger agricultural production in the second half of the year compared to the first half. We expect first half agri to average less than 3%.

Second half is expected to average 5.5% so that is clearly a tailwind. And government spending this year has been very backloaded. In the first six months, both total spending at the central and state level as well as capex spending was very muted given this was an election year. But in the second half we have seen a sharp recovery. I mean, just to put some numbers on this, total expenditure ex-interest grew at 4% in nominal terms in the first half.

In the second half, we think that quadruples to close to 17% or 18%. So, you have actually had a tale of two halves where in the second half we have had the benefit of a stronger fiscal impulse, stronger agricultural production, and that should drive gva higher, now that is the first part. There is also a second element to GDP which is that subsidies this year were frontloaded in the first three quarters and in the fourth quarter we expect subsidies to be meaningfully lower than the same quarter the previous year.

So, on a year-on-year basis you should expect a sharp contraction in subsidies, which means net indirect taxes will grow close to 15%. And therefore, a large gulf will most likely develop between gross value ad and GDP. While GVA is expected to be about 6.7 or 6.8, GDP we think could rise to 7.5 because net indirect taxes could grow at about 15%.


The wedge between GVA and GDP has been higher in the past and the GDP data has been lagging the GVA numbers. Do you see this trend to improve in coming quarters as well or this is just for this quarter?
Sajjid Chinoy: Well, it is important to recognise that when subsidies swing across the year, it is GDP that moves around a lot. So, you have a situation where subsidies are frontloaded. You could even have a situation where GDP is below GVA. So, because net indirect taxes, there are two components to that as well, there is indirect taxes which are much more stable and then you subtract subsidies.

But because subsidies can bounce around intra-year, the net indirect tax component extremely volatile. So, in a way you get a better signal from GVA because that is more stable, that is less volatile, that is an accumulation of growth from the production side, agriculture, industry, services, so GVA is where the signal is because the net indirect tax number that I spoke about of 15% is a one-off, it is going to happen for this quarter but not for subsequent quarters and so really GVA will be a better proxy of underlying growth dynamics going forward.


How is it that you see the underlying demand in both urban and rural areas also with early monsoon now perhaps impacting both geographies too?
Sajjid Chinoy: Over, the last few years, we have really had private consumption being driven by the urban areas, by the top 10-20%, we saw this for example in higher-end housing, we saw this in higher-end autos. We have seen this in higher-end services. We have seen this in premiumised production. But interestingly, what has been witnessed in the last four to six quarters is urban consumption has begun to slow. Passenger vehicle sales have slowed meaningfully.

And so this is not a surprise because some of the supports that had boosted urban consumption which is the fact that urban households had these excess financial savings from the pandemic, those savings have now been depleted. We have seen wage growth, if you look at wages in corporate earnings, that has gone from 12% four to six quarters to go down to 6%. So, you can see why urban is slowing because the underlying supports are faded, which is why it is really crucial that rural consumption pick up and offset some of the slowing in urban and you are encouragingly seeing signs of that.

If you look at NREGA demand, the last four months it has come off very sharply which is a good sign. Tractor sales have picked up and so really the expectation is that rural consumption will continue to lift and we are seeing these divergences show up for example in the Nielsen Data where FMCG volume growth in the urban has slowed meaningfully but rural has picked up sharply. Going forward, however, it is important that consumption more generally rise to the occasion. There are several factors that should help that.

You spoke about an early monsoon. Hopefully, this is an early monsoon that is not disruptive to agriculture, but is a signal that we get a fulsome monsoon this year, that will help agricultural production for a second successive year.

Inflation remains very benign, extremely benign, and so that hopefully will boost consumer purchasing power. We are in the midst of a monetary easing cycle and lower interest rates should hopefully help interest sensitive consumption and there was also an income tax cut in the budget. So, there are several drivers here of consumption. Hopefully, they will reinforce each other and boost consumption.

So, you are sounding optimistic about manufacturing sector, growth is expected to be subdued with non-financial listed companies and profit growth similar to Q3 and also IIP is at eight-month low. How do you see them moving now?
Sajjid Chinoy: No, there is no question that there are headwinds that are emerging for two reasons. One, as I mentioned, is urban consumption has slowed and we have seen that, for example, in passenger vehicle sales and that is going to have an impact on production. Exports, goods exports, have slowed in the last few months.

This in a way reflects the fact that there is a lot of trade related uncertainty, tariff uncertainty. So, when you do have an environment where some at the margin, some of the public investment thrust has softened, goods exports have slowed, urban consumption has slowed, there are going to be some headwinds on manufacturing.

What is slightly encouraging is that if you look at just the manufacturing subset of earnings, they were very soft last quarter and there is some recovery this quarter, but that is why I said with some of the investment impetus of the last few years beginning to roll off the onus on supporting growth will move to consumption and with urban consumption softening, a lot is going to depend on how rural consumption evolves and a lot is going to depend on the factors that I spoke about, if inflation remains benign that is a supportive factor.

We expect the RBI to undertake a meaningful interest rate cutting cycle and ensuring that that transmits to deposit rates and lending rates it is going to be really important. So, there are a lots moving parts at the moment.



And how much rate cut are you expecting then this calendar year given the fact that retail inflation is near a six-year low, so there is that elbow room?
Sajjid Chinoy: We have already had 50 basis points of cuts. We are expecting another kind of 50 basis points, that will be 100 basis points and remember the RBI has already infused a lot of liquidity, so in a way overnight rates are below policy rate. So, the de facto easing cycle will likely be larger than the extent to which policy rates are cut because of the infusion of liquidity.



What are your thoughts on exports? Do you expect exports to be a drag this quarter and how much do you expect the tariff to impact GDP in Q1 and has there been a frontloading in exports?
Sajjid Chinoy: Yes, we have not seen frontloading from India per se. Going forward tariffs and global uncertainty is going to be a drag for exports around the world. We have seen some frontloading in other parts of Asia, but frontloading in the first quarter or the first four-five months of the year just means that there will be payback later in the year. A lot ultimately is going to depend on US trade policy. We have seen just in the last 48 hours there was a stay on tariffs and now a stay on the stay. But from India's perspective, it is important that we just keep negotiating quickly with the US. If we can get a US-India free trade deal or bilateral trade agreement as soon as possible, that will take away a lot of the uncertainty for exporters in India, so that should be our objective. In a global environment, let us be very honest, it is going to be volatile and it is going to be hostile because you have both the direct impact of higher tariffs but you also have the indirect impact that, with all of these tariffs you will see a slowing of global growth which will have an impact on exports around the world including in India.