Sonia Shenoy Podcast: w/ Pranjul Bhandari on Rupee At Record Lows (Transcript)

You know, are we being able to export a lot or we are only importing? And the other is capital inflows. Are we getting enough capital inflows to fund all of these imports that we are doing?

And I think on both fronts, India hasn’t been as strong as it was a few years ago. So when we think about our trade balance, this is an oil shock. It’s a global shock. You know, we didn’t do anything about it, just landed upon us. Today, our imports have far exceeded our exports even more than before because oil is so much more expensive. So that leaves us with a trade deficit.

And now we need capital inflows to fund this trade deficit. And we’re not getting enough of that because in the last 2-3 years, FDI inflows to India, portfolio inflows into India’s equity markets have slowed. So this is leaving us with a pretty big balance of payments deficit. And that, I think, is the big driver of the weakness in the currency right now.

I would estimate it this year to be about $65 billion of BOP deficit. That’s my forecast. Last year was like $35 billion. So it’s a big jump in the deficit. And of course, the currency will then react to this fact that we have a deficit.

What Needs to Be Done: Short-Term and Medium-Term Challenges

SONIA SHENOY: So you’re saying the balance of payment deficit will go from $35 billion last year to $65 billion this year, purely because of the fact that there is, of course, an oil shock. And, you know, that’s hit the trade deficit quite a bit. But you also said that capital inflows are needed to fund the deficit, and that’s where India is struggling. What do you think is the need of the hour for these capital inflows to pick up?

PRANJUL BHANDARI: Okay, so look, if you want to save the currency or stabilize it and over time appreciate it, then I think there is both a short-term challenge and a medium-term challenge.

The short-term challenge — a couple of things. One is allow the currency to depreciate. I know it doesn’t feel good, but the truth is it is very powerful. It autocorrects. Every time your currency starts depreciating, what happens is that your exports start to look cheaper to the world. So the world starts buying more of it, and your imports become expensive. So you stop buying it — you know, “I will not buy that fancy luxury car this year, because the currency has depreciated, it’s a lot more expensive.” So then you stop importing that much. And that behavior change in itself tries to then narrow the trade deficit and helps strengthen the currency again. So one is let the free market do the job, don’t interfere too much.

But then once you’ve done a little bit of that, you want to also do other stuff. I think the one thing that is very important is allow the big rise in global oil prices to show up in the pump prices. Today when we go to the pump prices to buy petrol and diesel for our car, that has only been increased by ₹3.90 as of like this morning. Honestly, it should have been increased by ₹14 given how much global oil prices have gone up by. They’ve gone up by 40-50%.

So if you do that, if pump prices become expensive, then people become a little more conscious. They start carpooling, they start taking public transport, and then oil imports fall. And that in itself then shrinks your trade deficit and the currency begins to strengthen. So there is a lot of stabilization that happens on its own. It’s just that policymakers should allow a lot of the prices to pass through to the people.

I know it doesn’t sound very nice, but it is the bitter medicine you need. At the end of the day, we are being faced by this global shock of very high oil prices.

The Political Economy of Passing on Oil Prices

SONIA SHENOY: But passing prices on to a consumer at this point of time when anyway inflation is on the rise, cost of living is so high, jobs are scarce — it is a tough, you know, it’s a challenge, right? Especially for a government that is perhaps looking to sort of stay in power for a longer time, passing this global shock to consumers may not be the best strategy, and perhaps that’s the reason they’re not doing it.

PRANJUL BHANDARI: Well, so there is a political economy at play, and I completely agree with you. But look, none of us like this. This is a global shock. Oil prices globally have gone up, and the citizens of this country have to understand that, that petrol prices are rising not because of the government’s inefficiency, but because there are globally things that have happened in which every country, you know, has been hurt.

There is this very interesting chart of all the countries stacked up, how much they have raised pump prices. And India is sort of the bottom right. We are one of the countries with the least increase in oil prices around the world. Every country has the same political problem. But at the end of the day, this is a global shock and somewhere somebody has to pay the price.

So I hear you. It’s not very good news for consumers, but I’ll be also honest, I’ll take a step back. Today, if the government wants to help some vulnerable sections of the society, it can help them with cash transfers. You know, we have a very nice UID system, digital payments and all of that. It can help with that. Don’t distort the oil market. Let the oil market prices rise, import demand come down, and on its own, the correction in the currency happen.

The RBI’s Role: Managing Currency Depreciation

SONIA SHENOY: Okay. You also spoke about how the government needs to allow the rupee to depreciate. That’s something the RBI has also been doing for a while, right? Do you think enough has been done on that front, and/or do you think the RBI needs to take more steps to allow the rupee to depreciate further?

PRANJUL BHANDARI: So look, whenever this kind of pressure comes into the currency, then all the central banks, they divide it into 2-3 bits. One, they allow the currency to depreciate a little bit. The other, you know, they have FX reserves, they have been collecting and buying dollars, building up FX reserves of dollars for a rainy day like this, that when you have a rainy day, then you actually spend some of your reserves to protect the currency a little bit.

So similarly, RBI has also done the same thing. There was an exchange market pressure, so it allowed the currency to depreciate a little bit, and a little bit it ran down its FX reserves, it sold dollars in the market. Now, when you start selling dollars in the market, it’s a very strange thing. You know, you build up reserves for a rainy day. But when the rainy day comes and you start selling these reserves, everybody goes into panic. “Oh my God, you’ve sold so many reserves, right?” So you can’t do a lot of it. You have to do a little bit of it.

So generally speaking, when you have this kind of pressure, you have to distribute it a little bit to the currency, a little bit to the FX reserves, a little bit to the consumer, a little bit to the, you know, the oil marketing companies, a little bit to the government balances. You have to distribute it. And I think we are doing that. We’re in the process of doing that.

Is the Rupee’s Weakness Purely a Global Shock?

SONIA SHENOY: So you spoke also about how pump prices need to go up further. Now, I understand that this is a global shock and I understand that most countries are dealing with it. But actually, when you compare currencies — and I don’t know, correct me if I’m wrong — the rupee is the worst performing currency, even if you compare it to some of our neighbours, for example, whose economies are not that strong.

Are you purely blaming this on the global shock? Or do you think somewhere there are some inefficiencies in the system which have caused further weakening, not just of the rupee, but also of, you know, the macroeconomic data points, whether it’s a trade deficit, current account deficit?

India’s Export Landscape: The Good and the Bad

PRANJUL BHANDARI: Yeah, you got me on that, Sonia. I was like focusing only on the now and immediate, which is the oil price shock. But the Indian rupee hasn’t been a laggard in the region only in the last few months. It’s been a laggard in the region for the last year, even before the oil price shock struck us. So something was happening from before.

And that’s why I started talking about how some sentiments on India changed around the middle of 2024, when I think the confidence on India’s growth looked a little dimmer than the confidence people had in other countries around the world. Like, for example, Korea, Taiwan were doing so well in the trade. Vietnam, Malaysia were doing so well in the China Plus One trade. And the questions were, where does India fit in this entire theme? What is India going to do well in the next couple of years?

And when no answer was clear, my sense is we started seeing inflows into the country dry up. And this is even before the energy shock struck us. And the energy shock has only sort of worsened this challenge that we were facing. I think what we should be thinking about right now is, how do you make India attractive again?

Making India Attractive to Foreign Investors

SONIA SHENOY: Yes, yes. I was coming to that actually, because the big question now is how does India become attractive to foreign investors once again? And on that, do you have any insights into what is being done, whether it’s on manufacturing, whether it’s on services, whether it’s on investing in new technology?

Because there is a narrative, there is a negative sentiment, right? But there’s also work being done on the ground. The other day someone was telling me a lot of work is being done in this import substitution theme, for example. In areas like, say, solar pumps, in rural electrification, in auto ancillaries, right? A lot of the auto components earlier were from China, but now there’s a huge import substitution theme. So not just import substitution, even in global supply chain, for example, India is picking up. But from your lens, I wanted to understand, are you seeing any work being done on the ground?

PRANJUL BHANDARI: Okay, now this is where I started to get a bit excited. I must say good things were happening. I was getting very constructive on India towards the end of 2025. I was feeling positive about 2026. And then unfortunately, the energy crisis came. But before the energy crisis came, I think sentiments around India were rising again. And I think it was rising because India had also learned a lot from the mistakes it had made in the past. And it was really doing a lot of new and taking a lot of corrective steps.

One mistake I think India made for the last two decades, was it was becoming too protectionist. It was not trading enough with the world. The big mistake it was making was it was thinking about imports as a bad thing. You know, if you’re importing too much, it’s a bad thing. It’s very expensive. You’re doing something bad. But the rest of Asia thinks about imports very differently. Everybody who is a good manufacturer and exporter imports a lot of things, adds value to it, and then exports it back. This is the world of value-added supply chains.

Any country like, say, Vietnam, which has grown at a stupendous rate in the last decade, in the beginning, its imports really shot up and the government allowed it to shoot up, right? Over time, it was able to put a lot more value into the imports, add more to it, and then export. And then suddenly its exports also started to shoot up. This is something we’ve not done. We’ve put lots of import tariffs for the last 20 years. We were called the Tariff King for a reason. Our tariffs were very high. So if your cost of input is so high, by the time you go to the export market, you’re completely uncompetitive.

In the last 6 months, I think we were really changing this. We were cutting down our tariff rates. We were cutting down — what is harder than tariffs is non-tariff barriers, very opaque. We were stepping back on that. We were trying to lessen those. Most importantly, we were going out there signing trade deals with many advanced economies. In 6 months, we had trade deals with 6 economies: UK, US, EU, Australia, Oman, Canada. And the plan was to do a lot more. This was great and was a big change to India’s attitude to foreign trade in the past. And finally, it was also wooing FDI from many different countries, including China. There were some changes it made to some of its policy, becoming more welcoming of Chinese FDI. So I think all of these were very, very important and good steps.

Sonia, if I take a step back, I look at any country that has grown well for, say, 10 years or 20 years. I can’t think of even one country who’s done it without exports. Exports are very important. The United States during the World Wars, China in the last 30, 40 years, the Vietnams of today, all of them have only grown in a tremendous way because they have been open to trade and they have been big exporters. And finally, we were doing the right thing to actually become a beneficiary of that as well.

So I agree with you, the energy shock has come right now. It’s given us a pause, but I’m still hopeful that once the energy shock is behind us, all the hard work we did in the second half of 2025 in terms of integrating more with the world in trade, I think we could start seeing positive impact of that.

India’s Export Data: Where Do We Stand?

SONIA SHENOY: So, as you rightly said, right, exports are a very important piece for any country to get a larger seat at the global table. In terms of just the data, where are we at now in terms of India exports? Has it picked up compared to what we’ve seen, say, a decade ago? And what is your prognosis?

PRANJUL BHANDARI: Yeah. So good and bad news. Which one do you want to hear first?

SONIA SHENOY: I think I prefer hearing the bad news first. Okay, good.

PRANJUL BHANDARI: So that I can end on a positive note. Manufacturing, I think, is something we haven’t done well in. Manufacturing as a percent of GDP in India has been 18 to 20% today, 10 years back, 20 years back, and also 30 years back. We have just not been able to grow our manufacturing. And I think this has been a big problem. I think it’s a lot to do with ease of doing business, about India having too much of regulatory cholesterol. I think all of that has hurt us.

Anybody else who’s done very well in manufacturing, they’ve done it step by step. You start by producing really basic things like widgets, small toys, switches, and then you grow up and over the next 10, 20, 30 years, you start becoming producers of semiconductors and very advanced things. We sort of didn’t go up that value chain. And that’s where we didn’t learn by doing and we didn’t create manufacturing jobs. So that has been a huge miss for us.

The positive has been services exports. That’s where we did it right. We went up the value chain. In the ’90s, we were this large call center. Then in the 2000s, we were a software exporter. Then we became, you know, this whole iCloud, IT security. Then we became an exporter of professional services through GCCs. So we’ve really come up the value chain and we’ve done very well.

So I think these are the two parts. But because India is so big, just services exports alone cannot get us all the jobs and all the growth we need. We also have to do a lot more of manufacturing. We need to do both. Actually, India needs to do everything because we have to create 7 million jobs every year for the next 10 years. In 10 years, you have to create 70 million jobs. We need a little bit of everything. We’ve done well in services, but we need to put our act together for manufacturing.

The Impact of AI on India’s Services Sector

SONIA SHENOY: But even in services right now, with the changing technology, with AI, of course India is doing well in certain areas like GCCs, for example, but traditional IT services companies are sort of facing the heat right now. So do you think even that piece could struggle over the next 12 to 18 months?

PRANJUL BHANDARI: Yeah, that’s right. And that’s why manufacturing and doing a little bit more there is becoming even more important because services is also going through its own transition with the coming of AI. Yes, you’re right. It’s very hard to predict where it will go. But I do think that our GCC model is a strong model.

Today, if there’s a big corporate out there, say an MNC, and he has a choice between hiring somebody, say, in London or New York, number one, number two, hiring somebody in, say, Bangalore, Hyderabad, and number three, just relying on a bot — my sense is that that company will choose between a little bit of bot and a little bit of the person in Bangalore, Hyderabad, the combination of that. So I don’t think the GCC business will completely go away. I think it’s a great way for a lot of MNCs to cut costs and put a lot of their jobs in India where the cost of service delivery is a bit cheaper. So I remain hopeful that GCC as a business model will continue to thrive. In terms of the IT majors, yes, they will have to do a lot of revamp and make themselves ready for AI.

Why Has Manufacturing Struggled in India?

SONIA SHENOY: So coming to manufacturing, right, it’s very interesting to me how despite so many announcements, whether it’s the Make in India theme, whether it’s the import substitution theme, whether it’s the China+1 theme, we haven’t been able to scale up manufacturing in a very big way. If you look at the hardcore data, as you said, manufacturing as a percentage of GDP is still, what, 18%, right? What do you think went wrong and how can India fix this? If you take, say, some lessons from large-scale manufacturers across China, across the US, across Europe.

PRANJUL BHANDARI: Yeah, it’s a great question. The answer is complicated, but I would try to simplify it. I think it’s all about ease of doing business. Is it easy? Like today, if you were a foreigner trying to come to India, would you be scared to set up a manufacturing plant in India? The tax regime can be complicated, all the different licenses that you need. If you’re going to be working between different states, then the relationship between the states, the different tax and regulatory policy between the states, federal structure, lots of regulatory cholesterol from the past. I think it was all a lot about this whole ease of doing business that I think has hurt India historically. And that’s why manufacturing has not been able to grow.

SONIA SHENOY: That hasn’t changed in the last 5-10 years.

PRANJUL BHANDARI: So I think at every point there are efforts to improve it. I think at this point of time, in the last 2 years, we’ve been going through this whole deregulation drive in state and central government. It’s been done in a slightly different way than before. Rather than sort of seeing something which is very macro and high level, they’ve gone to really micro things — okay, there were all these strange rules that the area around any factory can’t be used. Why can it not be used? Yes, it can be used, because it was very difficult for manufacturers to buy extra land and not even use it. So a lot of small, small things have been addressed.

So I think on the back of that, a little bit of deregulation is happening domestically. On the other hand, externally, we are cutting down on import tariffs, signing free trade agreements, which is also good because, remember, in the past when we were selling textiles to EU, it was a tariff rate of 12-13%. When Bangladesh, Vietnam was selling, it was 0-3%. So our exporters had this big disadvantage always. So with these free trade agreements, that is getting solved. So things are sort of coming together. And that’s why I think once this energy crisis is behind us, let’s see where we land, because honestly, we are addressing many problems of the past.

Import Substitution: Is the Data Reflecting Ground Realities?

SONIA SHENOY: Is there any data to suggest that India is doing a lot of work in the import substitution theme? I’m asking because I get this feedback from a lot of entrepreneurs that across spaces, whether it’s renewable energy, whether it’s power, infrastructure, water, solar pumps, right? There’s a lot of work being done. But from your lens, are you noticing that as well?

PRANJUL BHANDARI: See, for me, I look at top numbers, manufacturing as a percent of GDP. Is it rising? No. Investment as a percent of GDP, is it rising in a major way?

SONIA SHENOY: No.

Industrial Policy and Its Challenges in India

PRANJUL BHANDARI: So yes, you can have some sectors that are doing much better than others. But is it a collective story that’s growing? And my answer is I’m not yet seeing it.

Industrial policy is something you’re talking about, which is a very interesting topic. In Asia, we’ve had a lot of countries following what is called industrial policy, in which the government gives large subsidies for a few sectors it handpicks. That let’s become great at semiconductors, let’s become great at defense. And then the economy revolves around those sectors.

In India, every time we’ve tried to follow industrial policy, we haven’t done it that well. And the reason we haven’t done it that well is because we have a very complex federal economy, so many states and then central government, different rules. So industrial policy generally hasn’t worked very well for us.

Maybe it worked a little bit, for example, handsets, right? And then the PLI scheme happened. It was like an industrial policy. We gave extra subsidies for handsets. It worked really well there. But then we tried to copy-paste that into many other sectors. Some did okay, but most didn’t really pick up.

I think the problem was that you need, at the end of the day, overall ease of doing business. And within that, then you can give some subsidies to some sectors. But first, you have to improve the overall ease of doing business. If you don’t improve that and you just give some subsidies, that’s not good enough.

SONIA SHENOY: Ease of doing business is something that a lot of people talk about. I would have assumed that the government, of course, is working on it. But maybe things take time, right? It’s a very large country with so many state governments.

I’m not to take any sides, but I’m just saying that maybe things are so different from what you see in China. Someone was telling me the other day that in China, if there’s a decision to build a freeway or a highway, whatever comes in the way of that — it may be communities, it may be forest — everything is just bulldozed, right? If that decision has been taken.

In India, I think because of our democracy and because there are so many different stakeholders, it kind of gets hard to navigate and make these very autocratic rules.

PRANJUL BHANDARI: Yeah, that’s a very important point you’re saying, because the thing is, we are also doing a lot, but the global competition is rising so much because other countries are also doing a lot and they’re becoming a lot more productive with time. And it’s all a relative game, right? What we are doing, is it as much as what others are doing?

The Jobs Crisis and the Export Solution

SONIA SHENOY: Absolutely. The other big problem that I am looking at, and of course you’ve mentioned that very briefly, is jobs. Because every year you have 9-10 million graduates who are entering the workforce. I was looking at some of the data. Youth unemployment in urban India, male youth unemployment is now in excess of 14%. And that’s just published data, right? I don’t know what the real data is.

Is that a big concern for you? And if yes, do you think this could turn from a demographic dividend to a demographic disaster? Because that’s what a lot of people are talking about.

PRANJUL BHANDARI: I think jobs is a global problem right now with AI, with robotics. Machines are doing a lot more, and human beings may not be needed for many jobs like before. So I think jobs is a global problem that we are facing at this point of time.

But when I sort of magnify the problem in India, my sense is that what we need right now is a lot more of private corporate CapEx. Private corporate CapEx is just basically companies deciding that they want to invest more, right? Like a company which produces toothpaste, putting up more factories to make toothpaste. Because as soon as you do corporate CapEx, you increase the capacity of your country to grow and to create jobs.

We need a lot more corporate CapEx. But here is the problem. A company will say that I’m not going to be putting up a new factory because I’m not really seeing the demand. And the consumer will say that I’m not able to demand more because I don’t have a job to give me the income to buy that extra toothpaste. So then you fall into a vicious cycle. Corporates looking at consumers, consumers looking at corporates. And I think in a way we are stuck a little bit here.

We are not the first country to be stuck here. Every country has been stuck here. What’s the way out? The way out is exports. Because what exports does, it opens up a new market. So a corporate will say that fine, nobody’s going to buy all my toothpaste here. But actually I can export a ton of it abroad, and I’ll create the job in India. I’ll give those incomes in India. So somebody who’s richer now can now demand more things. And then a new cycle of growth will start. And that’s why exports is so important.

I’m going on talking about exports. But to me, because I’ve thought about this long and hard, it comes down to being a little bit more open and trading and growing on the back of trade.

SONIA SHENOY: Absolutely. And 100% agree because you’re not the only one who’s spoken about export competitiveness and why India needs to get its act together. So in terms of sectors, which are the sectors where you think there’s potential for India to be more competitive on the export front and where India can leverage over the next, say, 2 to 3 years?

PRANJUL BHANDARI: Yeah, India has tremendous wage advantage. Our wages are, on the whole, much lower than, say, for example, China. I think mid-tech manufacturing is something in which India can do very well. I say that particularly because when I look at FDI flowing all around the world, FDI in mid-tech manufacturing is the one which is flowing the most.

And if you look at the recent example of Vietnam, it started with doing all of these consumer goods like textiles and toys and then footwear, handbags. And now it’s sort of moving up and trying to do semiconductors. And it also gives you this whole platform to start with. And this is where you can get FDI, which means another country who’s done it very well can bring their technology to you. And you can start from there.

There is a chance for India to rise right now here. I see this because after all these different geopolitical crises that we are seeing around the world, every country wants to diversify their trade partners. You want to buy not just all your LPG from Qatar, you want to make sure you buy a little bit from Algeria, a little bit from Canada, because if something happens in Qatar, then at least you have the others. So everybody is diversifying.

The good thing about diversification is that it gives a chance for new manufacturers to also rise. So I think India has a big chance in mid-tech manufacturing like textiles, toys, footwear, which can be very jobs intensive. You can get a lot of jobs on the back of that. And then of course, there will be all these high-tech sectors like automobile parts, drugs and pharma, semiconductors where you can parallelly try and keep pushing ahead.

Lessons from ASEAN: Vietnam and Malaysia

SONIA SHENOY: So you sit out of Singapore and you look at ASEAN economies very closely. I want to understand from your lens, what is it that the ASEAN economies are doing right now to increase their export competitiveness? And how can India learn from some of the lessons there?

PRANJUL BHANDARI: I would say Vietnam and Malaysia are two countries in ASEAN which have been attracting a lot of FDI. And they have been attracting FDI from a lot of countries, a little bit from China, a little bit from US. They’ve been very open to getting FDI from different countries. And they have been moving up the value chain. They’re learning by doing and from very basic goods to very advanced goods, they’ve sort of moved there. I think they are two great examples to sort of look at at this point of time.

SONIA SHENOY: But what is it that they’re doing right to move up the value chain?

PRANJUL BHANDARI: I think ease of doing business, making sure that there are important good supply chains, imports happen at a low price. Therefore, then you can also export. Good infrastructure in terms of power, connectivity. So that whole thing that you need, the whole ecosystem that you need, is very strong and they’ve really invested in that.

The Rupee and What It Means for the Average Indian

SONIA SHENOY: Okay, that’s very interesting. So coming back to the rupee, which is, I think, for most viewers or for most people who live in India, very concerning because the rupee changes a lot of things. It changes what your cost will be when you’re sending your child to study. It changes what your annual travel expense will be. It changes a lot.

And I’m not even talking about the economy from a government POV, I’m talking about it simply from a salaried person’s POV. This is also at a time when Indian investments are not doing that well compared to global investments, right? India is the worst performing market if you look at it from a 2-year horizon, and at a time when the government is sort of not making it very easy to invest in international markets for reasons well known.

So what do you think, how should an average investor or salaried person view this entire situation? Should one be worried or should one understand that, okay, this is how things play out when there’s a global shock? And what’s the best way to look at the rupee right now? This is the most commonly asked question that we get — should I be worried that the rupee is almost hitting ₹100?

PRANJUL BHANDARI: So look, it’s not just India. I think all the countries are going through this energy shock. And this is an energy shock that impacts everything — your currency, your growth, your inflation, your fiscal deficit, like everything. So one is that we have to accept it, that this is a global shock and there will be negative repercussions in our country like everywhere else.

But coming out of the global shock, and this is the work I do, my day-to-day job is to look at when can that turning point for India come? So in a way, what am I watching? And at the end of the day, I can say that, oh my God, this has turned. I think now India is looking up again.

It is FDI inflows into India. I am really watching that. We’ve signed all of these trade agreements, or we’ve actually finalized trade agreements with, say, EU, UK, US. They will get operational over the next year. On the back of that, I’m hopeful that we will see FDI inflows coming into India.

I’m very excited about the India-EU trade agreement, for one. I think there are two very large regions whose trade agreement is not just about goods and services trade, but also about financial services, investment in defense and technology, a lot of cooperation. There are two countries who want to have their own autonomy in a world where you have two big powers like US and China. So these two countries can really partner a lot. I’m hoping that we start seeing more FDI from UK as well.

Once the flow of FDI into India begins, A, it’s good for the currency in the short run. B, you know that they are coming into India to do business, to do manufacturing, to produce services. New jobs will come, growth will be strong. So it can help in multiple ways. So I’m going to look at gross FDI into India.

Another reason why I’ll be looking at this number is because 3 years ago, when India was looking very good, actually gross FDI into India was doing very well. Every time India has done well, you take a step back and you peep into the FDI data — look, that’s coming in. So in a way, FDI inflows is a great leading indicator for the kind of real GDP growth you can expect in the next year or two. So I’ll be watching for that.

What the Government and RBI Should Do to Stabilize the Rupee

SONIA SHENOY: And if you had to list down 2 or 3 things that the government or the RBI or the Finance Ministry need to do right now to save the falling rupee, what do you think it could be? Look, I know you mentioned earlier that they should let the rupee depreciate, sort of free market movement should be a part of it. But what are the 2 or 3 things that you would have done if you were, say, in the ministry?

Managing the Rupee: Policy Levers and Trade Agreements

PRANJUL BHANDARI: See, distribute the costs across various agencies. Don’t let any one person suffer fully. So a little bit of increase in pump prices, little bit of rupee depreciation, little bit of use of FX reserves. So we are doing that, but continue to do that. That’s one, and that can be pretty powerful.

In 2022, if you — we have all forgotten, but in 2022, average oil prices were also $100 a barrel. And that time, in a matter of 10 days, the government increased pump price of petrol diesel by ₹10 a litre. And that helped in so much adjustment in the currency. It got us $20 billion saving in the next 3-4 months.

So I think we can get a lot of saving by just doing all of these things, increasing pump prices a little bit and all. But eventually fast-track all these trade agreements you have finalised so that FDI starts coming in. Once FDI starts coming in, FPI into equity markets also start coming in. Perhaps clean up some of your tax regime. Today, I think a lot of the taxes that the foreigners face in India can get quite complex. Try to clean that up a little bit. Those are also good sort of market deepening steps that can be taken. Do all of this and then hope for the cycle to turn.

Simplifying India’s Tax Regime for Foreign Investors

SONIA SHENOY: On that point, there is, of course, a lot of demand coming in from the investor community to reduce taxation, say reduce STT, or work on reducing short-term capital gains tax on equities. But I do understand that that’s a big source of revenue for the government. It’s kind of like a low-hanging fruit, right? On that front, do you think tweaks should be done? Or I mean, it won’t move the needle much?

PRANJUL BHANDARI: I think making it easier, making the tax regime easier, I think can have a lot of benefits. So not necessarily always cutting tax rates in a major way, but actually just making it easier and more predictable. We also make a lot of changes in our tax rates. We jump around a little bit on all kinds of rates like capital gains tax, withholding tax. So try not to do that. Try to keep them uniform and make it easier.

One thing which a lot of people are talking about is something called resident-based taxation. So if you’re an American investor into India, you actually follow the tax regime of America, right? Because it’s very difficult for them to follow the tax regime of India and of America. And sometimes they’re not able to get a full offset. So there are a lot of complications and there are ways to ease it. So we should really look at making the path very easy for foreigners to come into India across all asset classes.

India’s Growth Outlook: Bracing for a Tough Year

SONIA SHENOY: Okay. Finally, some thoughts. Since we always talk about growth as well, I wanted to just ask you your view on growth. Is India growing at the pace that — I mean, of course, now there’s an external shock, so that derails a lot of things. But how do you see the growth path of India right now? And what are your own forecasts, say, for the next 1 to 2 years?

PRANJUL BHANDARI: Ouch, that’s a tricky one. Because the next year is going to be a tough year. Let me not mince words here, because you have — A, you’re in a world in which there are simultaneous and recurrent global shocks. You had the pandemic, then you had the Russia-Ukraine issue, then you had the tariff wars. Just as you were standing up on your feet, you’ve had the energy crisis. And my worry is that in the next few months we are going to get the El Niño, the weather phenomenon that is actually very bad for agriculture, that also comes in. So it’s back-to-back shocks. It’s very hard.

I think the next 12 months will have weak growth. My own number is close to 6% growth, which is like a good 1 to 1.5 percentage points lower than the previous year. But I think we have to just brace for the fact that it’s going to be low growth for this particular year, like it’s going to be in many other countries as well.

SONIA SHENOY: So India is going to degrow compared to what we saw last year, and it’s largely because of the multiple factors that you spoke about right now. Wow, that’s not a great place to be.

PRANJUL BHANDARI: Well, it is a global shock at the end of the day. And that’s why newspapers, everybody around the world is only talking about this energy shock right now because it does have repercussions in all the economies.

One last thing I want to say about growth. Whenever you have a supply shock like this, what really happens is that inflation rises because the cost of inputs of oil and everything rises, right? And the people who are most sensitive to inflation are actually the informal sector. So whenever I think about Indian consumers, I divide them into 3 parts. The top is the urban formal sector, like people like you. Then there is the urban informal sector, say somebody who has a small shop or works in a very small company, a micro or MSME. And the third is the rural Indian. Each of these make up one-third of India’s consumption.

When you have a shock like this, it’s the bottom two — the rural Indian and the urban informal — who are very price sensitive, and they will take a hit. That’s two-thirds of India’s consumption. So I think that’s where we’ll see most of the disruption. Who is relatively better off is the urban formal sector person.

The Wealth Gap, the Middle-Income Trap, and the Path Forward

SONIA SHENOY: There’s also this whole thing about how the wealth gap in India is the highest it’s ever been. And there is this whole middle-income trap, right, where of course the rich are getting richer and perhaps even leaving the country. We’ve seen the highest number of millionaires leave India, and the poor are the ones who still get the freebies or the subsidies. I do understand that there’s a growing class of middle income that is deeply disappointed with the fact that A, there are no jobs and B, there is inflation, cost of living is rising. Any thoughts on that? And if you take lessons from, say, other countries where this has happened, what do you see as the solution?

PRANJUL BHANDARI: So unfortunately, in the history of economic growth, whenever a country starts to grow at a very rapid pace, in the beginning inequality rises. But the whole challenge then is that fine, some people have done better than the others. But is the system strong enough to then over time pull up the person who hasn’t done very well in phase 1? So that is how countries become from low income to middle income to high income.

So I think we’re there as well, that of course some parts of the country, some consumers, some individuals, some groups have done much better than others. For us, the challenge is to pull up the ones who haven’t done very well. So in a way, crudely speaking, we’re talking about how do you take people in the informal sector and get them more formalized — a good job with good social security, a decent pay. I think that is the challenge. And then I’m going to go back to what I was saying. What you need to create jobs is corporate CapEx. And I think we should try to get this new source of growth — exports — to happen sooner than later.

Pranjul’s Career Journey and Life at HSBC

SONIA SHENOY: Okay, Pranjul, we’ve run out of time, but thank you so much for joining us. I’m going to do another episode with you only to understand more about your own journey and how things have been for you. You’ve had a remarkable career and I hope you continue to do well. By the way, just one last question. Since you have been with HSBC for like over 10 years now, how has the journey been for you and where do you see yourself, say, 5 years from now?

PRANJUL BHANDARI: Ouch. I should have come better prepared for that. But look, I love what I do. I love doing economics research. I think about myself as a bit of a detective trying to figure out stuff which other people are not finding very easy to understand on the economy. I love covering more than one country. So I do India and I do ASEAN because everything is so interlinked and you can learn a lot from looking at various growth opportunities. I love looking at multi-assets. For example, I look at FX rates, rates, equities. I look at the economy. Everything is interlinked, and I just love all of that.

I’ve done roles in both the private sector and the government. I used to work in the Ministry of Finance, the Planning Commission and all of that for a long time. I worked in a couple of banks. I was at the IMF in Washington, DC. So I love the way the private sector and the public sector also interact. So I hope I can keep doing a variety of things because I think that’s how I grow as a thinker and I have better insights as I grow older.

Being a Woman in a Male-Dominated Field

SONIA SHENOY: And I’m sure in your area, in your field, you must be one of the few women, right? Because it’s largely a man’s world, especially in the economist fraternity, in the Ministry of Finance. How do you feel about that? Do you get imposter syndrome? Do you feel like you don’t belong there? And is it like a boys’ club? It’s very interesting to me how women operate in what is so-called a man’s world.

PRANJUL BHANDARI: Well, look, the truth is that there are many other women also out there. But you’re right that the challenges are more for some of the women because there are multiple roles that you have to juggle equally well. So you have to show up in the morning, you have to go back and take care of your kid, make sure he’s going to school and doing his homework. So the challenges are a lot more. So from that perspective, yes, it becomes harder.

And then as you see, in the beginning, like when you were in university, there were equal number of girls and boys in class, right? But as soon as you keep going up the ladder in the corporate world, the women start to sort of not be there. And then you’re left with a lot more men. And the reason is the women have so much more to do. So juggling, for women, of course, is the big challenge. But I don’t mind a challenge. So it’s been good so far.

SONIA SHENOY: So any advice to women who want to kind of follow your footsteps?

PRANJUL BHANDARI: Look, I would say just take as much help as you can, at home, at work. I think sometimes women have this whole thing that they will handle everything. Home has to be perfect, work has to be perfect. Just go with the flow, take as much help. If you’re senior, then just delegate like crazy. Let other people also grow alongside you. I think that’s the only way you can keep up.

SONIA SHENOY: Okay, that’s some very helpful advice even for me. Thank you so much, Pranjul. It was such a pleasure speaking to you. And I’m sure we’re going to do a round 2 the next time you’re in Bombay.

PRANJUL BHANDARI: Thank you for having me. Lovely to be here.

SONIA SHENOY: Thank you guys for watching. All feedback always welcome. Thanks for being on The Money Mindset.

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