India: Interview with Société Générale


Kunal Kumar Kundu is the India economist at SGCIB and is based in India. Kunal joined SG in August 2013. Prior to this, he worked with Roubini Global Economics, Infosys (for a global investment banking major) and FITCH Ratings India. Kunal has more than 21 years of experience in financial research and is widely quoted in the Indian and international media. He is a prolific writer and regular columnist. He started his career as a journalist with Dalal Street Investment Journal (one of India’s leading investment magazines) in 1996. He has a Master’s in Economics and holds post-graduate diplomas in Business Management and Equity Research & Analysis


  • Do you think the stimulus measures taken to date by the government and the Reserve Bank of India will lead to a quick economic recovery later this calendar year?

To be able to evaluate the impact of the measures on the economic recovery process, we first need to understand the composition of the stimulus measures. While the total stimulus being talked about is to the tune of INR 20 trillion (10% of GDP), it is part real fiscal, part credit guarantee and part monetary.

Even before Covid-19, the economy was already slowing, engendered by weak consumption and investment. Essentially, both consumer and business sentiment were faltering. The Covid-19-induced social distancing measures and eventual lockdown, however, annihilated both. While these measures caused both demand and supply disruption, the bigger challenge is to address the demand problem caused by massive job losses, especially of migrant laborers and of MSME employees. The main focus of the package should have been to boost demand and protect employment. This required large dollops of real fiscal stimulus, not just credit guarantee and liquidity enhancing measures. By our calculation, the actual fiscal component announced was only 0.8% of GDP and that announcement was spread over two months, further reducing the efficacy.

So, to answer your question, no I do not see a quick economic recovery later in the calendar year. We currently see two quarters of contraction and virtual zero growth during the December quarter.


  • Have the measures taken so far met your expectations? Could the government and RBI go further?

In one word, no. As I said, the ongoing problem requires a proper fiscal response. Every other response ought to have complemented a direct and adequate fiscal response. Conversely, what we are seeing is a paltry fiscal response aiming to complement other responses that are not relevant for the moment.

To give credit where it is due, the Reserve Bank of India (RBI) has been doing quite well. Even before Covid-19, I have been asking for a fiscal response to the emerging economic challenge; but, in the end, it was the RBI that was doing all the heavy lifting. And it remains the same even now. Unless the fiscal spigot is opened up, additional monetary policy easing measures would not be effective. So, yes, the government can and should go further with fiscal measures. As for the RBI, they did cut the policy rate by 40 basis points as was expected by us but in an unscheduled meeting. For the time being we do not expect any further rate cuts unless data worsens further. But we do expect them to keep a close eye on the data and, if need be, come up with more general and/or sector specific liquidity enhancing measures.


  • Which sectors will be most affected by the lockdown?

For the first time, a slowdown is being led by the service sector. I believe non-essential services and services and activities that require the physical presence of customers will be the most affected by the lockdown and even so after the lockdown eases, especially airlines and hotels, entertainment and shopping. Within services, transport and communication and logistics services will also be badly hit, as will health services catering to non-Covid-19 cases. I would also be worried about the banks, especially the public sector banks and non-bank financial institutions (NBFIs) that are not part of big corporate houses, facing the brunt of default after the moratorium period is over.

In manufacturing, the sectors likely to be hit the most are auto, construction and textiles.


  • What do you make of the government’s recently announced USD 266 billion stimulus package?

As mentioned earlier, in a certain way, I am disappointed. The announcement eschewed additional measures for the most vulnerable sections of society, i.e. migrant laborers and unorganized sector employees. In has to be noted here that this package is all inclusive, i.e. the first fiscal package announced in late March post the announcement of the first lockdown is also part of the total package. We have written earlier that the fiscal package 1.0 was minimal and would have a limited impact. However, even the remainder of package (in fact a series of announcements made over nearly a week) did not do much better. Especially, the real fiscal component was miniscule, even after taking into account the package announced in March.

The majority of the package therefore consists of credit guarantee and liquidity measures announced by the RBI. Fiscal spending aside, we also have been clamoring for government credit guarantee since the highly risk-averse banks have virtually stopped lending despite trillions of rupees of liquidity made available by the RBI. Despite a multitude of measures like cutting the CRR (cash reserve ratio), LTRO, TLTRO, Operation Twist, OMOs etc., the risk-averse banks have been parking an increasing amount of liquidity with the RBI in the reverse repo window. To that extent, government credit guarantee can reduce the risk perception of the banks and might encourage them to lend and help in the better transmission of the slew of monetary easing measures undertaken by the RBI.

However, as I reiterated earlier, India is facing a massive demand contraction and all the liquidity injection and credit guarantee measures can only ease supply constraint, which is not the most pressing challenge for India.


  • Do you expect the current downturn to leave lasting damage on the economy and hit potential growth?

Yes. Lack of adequate and appropriate fiscal measures will not only make rebooting the economy that much difficult but would also adversely impact India’s potential growth rate. In fact, I believe India is entering a new (ab)normal: real GDP growth of around 6% on average over the next few years, quite off the 8% growth rate that was considered as given.


  • What are the key upside and downside risks for the immediate economic recovery?

Upside risk: Announcement of an effective treatment if not a vaccine for Covid-19 or a sudden flattening of the infection curve that would encourage immediate and all-round easing of lockdown.

Downside risk: Extension of lockdown.


  • PM Modi has promised to turn India into a USD 5 trillion economy by 2025. Is this still possible?

In the current situation, nobody is expecting the 2025 deadline to be met. I think it might take another three to five years depending on how soon the economy comes back on track and how the currency behaves.


  • What are the key challenges and opportunities for the Indian economy in a post-Covid-19 world?


  1. Labor shortages for the industry would constitute the biggest challenge in the post-Covid-19 world. Lockdown has underlined the extreme dependence on migrant laborers. However, the lack of any social security measures and any form of viable fiscal support has resulted in large-scale reverse migration and it is extremely likely that, given the psychological impact on these workers, they would be extremely reluctant to migrate back to the cities en-masse as soon as the lockdown ends.
  2. Permanent job losses as the economy’s potential growth rate takes a hit and hence recovery of aggregate demand will be quite weak. In any case, given the uncertainty, I think that the propensity of Indian households to save will rise as household savings has by now dropped to its lowest level in over a decade.


  1. Ability to cater to the changing consumer behavior is a big opportunity. Even before Covid-19 there have been indications in multiple surveys that the demand pattern of millennials is quite different from what we have seen earlier. There has been an increasing focus on the circular economy and possibly less on ownership of physical assets.
  2. Green products offerings may also be an opportunity as there are indications that people are now increasingly becoming more environmentally conscious.
  3. Innovative online offerings, be it is manufacturing or services.


  • What are the key reforms that India needs to fulfill its economic potential?

There is now seemingly a rising trend of companies trying to relocate their factories out of China. This offers India a great opportunity to get into global manufacturing by taking advantage of the reshoring trend.

Given that India is barely integrated with global value chains, when the Sino-U.S. trade war erupted, countries like Vietnam and Bangladesh were the biggest beneficiaries and not India. The rising reshoring trend, however, provides India with another opportunity.

For that to happen, India needs to invest in its physical infrastructure. This of course requires, among other things, prudent land and labor reform measures. Existing labor laws in India are highly complicated and there is an urgent need to make them simpler. It’s wrong to believe that allowing easy hiring and firing policy would serve the purpose. The fact is, despite an apparently strict labor protection law, wages of Indian laborers are very low and the working conditions are often difficult. Moreover, the surge in unemployment from less than 9% in mid-March to nearly 27% by April does indicate that it’s not too difficult to fire workers. In fact, without proper social security and/or unemployment benefit measures, focusing only on hiring and firing may be counterproductive. The focus ideally should be on simplifying labor laws. Similarly, the laws surrounding land acquisition need reform, which favor neither the owner of land nor the acquirer.


  • How do you see monetary policy evolving over the next 12 months?

We were expecting an additional rate cut of 40 basis points and published a note the day before the RBI did just that in an unscheduled meeting, two weeks ahead of schedule. Now with the RBI officially expecting the economy to contract, it is possible that they might cut further (though currently not our baseline scenario) if the economy shows signs of even deeper contraction. We also see potential of more sector specific liquidity measures by RBI as more data on sectoral hit emerges.

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