Hello. India’s inflation is still too high, driven in part by rising food costs, for the RBI to cut rates... but what if India decided to stop counting food as part of its inflation calculation? It might seem crazy, but it is exactly what the government’s chief economist argued for last month. Before we investigate if this argument has merit, we’ll look into whether India’s economic growth is too slow, and then close with Gupshup, a roundup of the most important headlines from the week.

BTW: Do you know India’s oldest continuously inhabited city? (Answer at bottom)

Markets

Read here for an appendix on the above.

India is Growing, But Fast Enough?

Goldman Sachs downgraded India’s growth to 6.7 percent in 2024, and 6.5 percent in 2025. Even at a 7 percent growth rate, it will take India 56 years to catch up to the GDP per capita the U.S. enjoys today. Goldman’s downgrade is in part driven by a 35 percent annual decline in government expenditure in the April-June quarter, a reflection of the Modi administration’s aim to reduce the fiscal deficit to upgrade its long-term sovereign debt ratings. RBI has also ramped up its crisis deterrence, ramping up limits on loans to projects under implementation and putting restrictions on domestic and international capital flows. 

As discussed previously, India’s banking regulators are worried about the historically high build of bad loans in the financial system, which has now reached lows of around 3 percent; however, as former RBI leaders have argued, India would be able to more easily reduce bad loans by privatizing its large national banks rather than constantly regulating the loan market (Samosa Capital’s piece on privatizing banks). Consumer expansion is continuing to be deterred, after 63 percent of Indians reduced non-essential spending in 2023, by inflation and high rates. 18 months of high RBI rates have put pressure on construction and manufacturing: the manufacturing purchasing managers’ index dropped in July to a three-month low, from 58.1 to 57.9. The index measures various economic factors driving the manufacturing industry, including new orders and output, and is based on preliminary survey results. Manufacturing, which is India’s largest industry, declined for the first time in 11 months, HSBC reports.

India’s companies have been lathering on debt, a 15 percent increase this year. While a strong sign for increasing future growth capabilities, corporate profits are growing more slowly: aggregate corporate earnings have slowed, rising only 4.4 percent this quarter year-over-year, its slowest pace in six quarters. Profits of 40 Indian companies were cut in half in the April-June 2024 quarter due to the rising cost of inputs.

For a non-recessionary year, after three years of easing up supply chain restrictions globally and far higher global demand to manufacture in India to diversify away from China, ~7 percent economic growth is slow, and far delays Modi’s hopes for a developed India by 2047. 

India’s growth story is ironic: while most countries struggle to grow because they cannot lure demand, India is limiting its growth by not keeping up with it. Economists have argued that India needs far better ports to become the center of trade foreign investors want it to be, liberalized capital and financial markets so that resources can be organized efficiently, and fewer restrictions on bank loans and deposit return rates so that a growing private banking sector can keep up with credit demand.

Foodflation

RBI cutting rates would be a huge win for increasing India’s economic growth projections, Governor Das has insisted it is not possible until price growth subsides to its 4 percent target. Food prices, which have risen 6.3 percent, have played a massive role in pressure on prices. A potential solution? Stop counting food inflation.

On its surface, a radical idea. However, the government’s chief economist recently argued in his primary policy document that food prices should be excluded from the central bank’s inflation target. He argues that the central bank can do little about the supply-side problems driving food inflation, and it distracts monetary policy from focusing on demand-side issues. For example, grain prices in India are largely set by government mandates on how much farmers should be paid. India closely tracks its rainfall, as a poor or strong monsoon season can usually explain nearly all of the volatility in food prices. Currently, India is amidst a weak monsoon season, which holds a lot of blame for rising food costs that the RBI can do little to address.

India also already overweights food in its consumer price index, which is 45 percent of the basket. Mihir Sharma, in his Bloomberg Opinion piece, argues that a high weight on food is a relic of India’s poverty-struck past. Now, as the middle class grows, food costs are taking a smaller piece of income.

“One of India’s problems is that, even as it grows richer, it struggles to change policies to match. Economic frameworks designed for when it was a much poorer country constrain and limit growth,” Sharma writes.

RBI will likely not change its CPI weighting. Firstly, it is not a good look to change how you keep score when you’re behind. Secondly, food prices still drive Indians’ expectations for future price growth and because of its large agricultural economy, quickly can become entrenched in the broader economy. However, countries like Indonesia have already become comfortable frequently adjusting their basket of goods to reflect the evolving spending patterns of its people.

Macro

India’s manufacturing slows down in August

• The manufacturing purchasing managers’ index dropped in July to a three-month low, from 58.1 to 57.9

  • The index measures various economic factors driving the manufacturing industry, including new orders and output, and is based on preliminary survey results

• HSBC reports manufacturing volume declined for first time in 11 months

• Manufacturing is highly sensitive to recent rate hikes, which RBI has maintained for 18 months

Northeast state of Jharkhand, the largest coal producer in the country, passed a bill increasing taxes on coal and mining, expected to inflate commodity prices (BBG)

• This comes after the Supreme Court of India greenlit the right of states to levy their own taxes on mining

• $1.19 (100 rupees) will be taxed per ton of coal and iron ore, $0.83 (70 rupees) on bauxite, $0.60 (50 rupees) on limestone and manganese

Apple soon to release India-made iPhones (BBG)

• Apple has assembled $14 billion worth of iPhones in India on the heels of nearly $1 billion in financial incentives offered by the Modi administration

RBI halts new strategy for Indian millionaires to move money abroad (BBG)

• Gujarat’s new financial district, which includes a special economic zone with limited regulations on imports/exports and foreign investment, was a potential place for wealthy Indians to move their family offices to invest abroad potentially

• RBI has advised the state of Gujarat to limit family offices from opening there as a risk of wealthy individuals circumventing the nation’s capital controls

• RBI has strict limitations on the outflow of money, read more here

Federal Bank says it struggles to gather deposits as demand for credit increases (BBG)

• As deposit returns are low, the bank struggles with deposit growth to keep up with demand for credit

• Indians are seeking higher returns in alternative investments, like equities, rather than saving money in deposits

Equities

India’s PB Fintech Ltd. becomes best performing financial technology stock globally

• The company, which was listed in 2021 and provides online insurance and uninsured credit lines, has risen 110% in value YTD

  • An index tracking global fintech companies has only risen 15%

Gautam Adani hires CEO for family offices, auditors, to revamp image post-Hindenburg Research (BBG)

• Bloomberg reports Adani is speaking to two major global accounting firms to hire auditors to go through the family office’s books

• The moves would bring Adani in line with traditional corporate governance from founders running separate businesses

Hindustan Zinc Ltd, operated by Vedanta Group, will pay $958 million (80.3 billion rupees) in semiannual financial dividend (BBG)

• The world’s second-largest mining company will give $0.23 (19 rupees) per share

• India’s federal government owns 29.5 percent of Hindustan Zinc, while London-based Vedanta owns 63.4 percent

• Vedanta Group is looking for increased cash to pay off $3 billion in debt over the next 3 years

Vedanta Group’s Hindustan Zinc Ltd. will pay about 80.3 billion rupees ($958 million) as the second mid-year dividend for the financial year that started on April 1.

Adani Group to raise $500 million from cement unit sale (BBG)

• Ambuja Cements, which Adani Group bought in 2022, will sell shares at 600 rupees each, a 5 percent discount from end-of-day trading

• The company has a market cap of $16.56 billion and has emerged as the nation’s second-largest cement producer

Alts

Mumbai-based private equity firm Multiples Alternative Asset Management seeks $300 million to continue holding on to assets (BBG)

• The firm has $3 billion in assets under management and is backed by the Canada Pension Plan Investment

• Using a continuation fund structure, which allows owners to retain assets without selling, Multiples will retain Vastu Housing Finance Corp and APAC Financial Services

Politics

India will provide $3.5 million to fund projects in the global south that will promote trade

• Has been described as an attempt for New Delhi to position itself as a leader among developing nations

Modi engages in diplomacy-first foreign relations in visit to Poland and Ukraine

• “No solution can be found on the battlefield,” Modi said in Warsaw during a press conference with Polish Prime Minister

• Poland government announced India has a role to play in ending the war in Ukraine after Modi’s visit

• Modi is the first Indian leader since the Soviet Union’s dissolution to visit Poland and Ukraine

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Oh, and Varanasi is India’s oldest continuously inhabited city. With evidence of residents practicing many of the same cultural and religious practices 3,000 years ago, visitors describe it as a time machine to an ancient time.

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Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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