India is in a phase of strong structural economic reform that typically takes time to get reflected in macro numbers and country rankings such as ease of doing business, says Kaushik Das, India economist at Deutsche Bank AG.
“I am not concerned by the fact that we are not seeing big jump in rankings when it comes to ease of doing business, because this is inevitably going to follow. As you know, the markets are going to lead expectations, and markets have already given a thumbs-up, and these ranking will improve in the future,” he added in an interview.
Edited excerpts:
Deutsche Bank in a recent report said “history suggests India’s government is about to embark on a spending spree”, as it prepares for a re-election. This is a government that has kept deficit and inflation under control. Can you see it do more over the next 24 months and expand the deficit?
First, step back and see what we’ve achieved from mid-2013, when we had the currency crisis to now. Since then, be it inflation, fiscal deficit, current account deficit, growth—across all parameters—India has shown steady progress, and you don’t have any another emerging market country today that has this kind of strength and stability.
On top of that, we’ve seen a series of reforms over the last three years. Despite growth being slightly below normal, the government has stuck to fiscal consolidation. Fiscal prudence will pay off in due course of time. We think going forward, in the next two years, we will see a lot of investment in infrastructure-related projects, and on the capital expenditure front, simply because the private sector is not investing as much as it should because of structural problems.
The government has already stepped in and increased expenditure, and the momentum will be maintained over the next two years, and growth will get supported without any kind of fiscal problems, and you will see fiscal consolidation continuing as per the FRBM (Fiscal Responsibility and Budget Management) committee recommendations.
We need to look at spending as a percentage of GDP (gross domestic product)—percentage y-o-y (year-on-year) will go up. If you see the government budget for FY18, they are showing spending to come down on a y-o-y basis, which is why we had called the budget very prudent. What could happen is that there could be some extra dividend from demonetisation that is still not factored in the budget—if RBI (Reserve Bank of India) has the space to give more dividend to the Indian government, that could give some extra money. Then there is the recent voluntary disclosure scheme, which the government announced post-demonetisation. These one-offs have not been taken in the budget, and whatever comes from these will be extra windfall gain, and it can used to prop up social infrastructure spending.
Is this growth that we are witnessing leading to job creation? How big a concern is jobless growth? Data suggests that we need to create between 1.5 million and 2 million jobs per month.
Be cautious when you put numbers to job creation, because we do not have any formal data from the government on the number of jobs that are being created. People try to draw conclusions from piecemeal data that they get. You will see jobs come through along with growth, and this why the government is focusing on certain sectors that will give a fillip to jobs and have a multiplier effect. One could be increased focus related to low-cost housing. Or, if you draw this further and think of urbanization itself as a focus area of this government, then what happens is that it creates other layers of jobs.
The concern on jobless growth is overrated. India will continue to grow at between 7.5% and 8% range over next 3-4 years. I am forecasting 7.5%, but I see the potential going up - when GST (goods and services tax) comes through, it will add at least 50 bps (basis points) or more to the growth rate.
So with GST, is India’s peak potential for growth still around 8-8.5%. Do you see the potential for double-digit growth?
I am not in the camp that believes we will see double-digit growth, because you should remember that after 2008, the global normal for growth has changed. If you get 8% growth, that is an amazing outcome. What you need to focus on is not just the headline growth number, but the quality of growth, and if growth is getting supported only through consumption, or is there a healthy mix of consumption and investment?
If it is the former, where growth is getting supported only via consumption, then you could have inflationary expectations increasing, which then complicates RBI’s decision on what to do on the rates front. The problem today is that growth is mainly supported by private consumption. Consumption has always been strong despite demonetisation.
The issue is how do you raise private investment, which is below normal levels. We think we have seen the worst as far as private investment cycle is concerned, and going forward, with the government’s focus on investing more, you could see a multiplier impact on the private investment side unclogging projects, the banking NPAs (non-performing assets) going down a bit more from here, and therefore, you could see private investment uptake that can support 7.5% to 8% growth in the medium-term.
You highlighted the consumption story driving growth—so is India a one-trick pony with its markets being largely driven by consumption? Where can we diversify?
The consumption story has always been strong in India and will continue to remain strong because we have an aspiring and young population.
If you look about the macro demographic dynamics, you will expect more of the younger population coming into the workforce over the next couple of years.
There will be a focus on urbanization. The amount of urbanization we’ve had in the past 10 years, you’ll see the delta, or the change in urbanization increasing significantly—what does this mean? If we urbanize like China did, you will see consumption picking up in a big way. On diversification, just think about India’s need for infrastructure.
India needs infrastructure and it can solve a lot of problems of inflation and on the supply side. If you believe the India story, that the country is rebuilding and going into a structural path and trying to increase the growth potential, then people will also be positive on the infrastructure stocks and sectors, as well as proxy of infrastructure like cement and steel.
Most of the big-ticket reforms that we’ve all been talking about when the Narendra Modi government came to power have been done. What more does the current regime need to do? Also, despite the reforms kicking in, India’s ranking when it comes to the ease of doing business, has only improved marginally. What is your take on this?
When you think about reforms, we’ve done and announced a number of them, and now we just need to ensure that they are executed properly.
They are reforms like fiscal ones—if you have seen the FRBM committee saying that India’s debt to GDP ratio should come down to 60% from the current 70%—these are all ongoing, and you don’t have to announce big-bang reforms every month.
If India continues with what it has announced, and continues to take steps with regard to ease of doing business, which it has been doing, you are moving in the right direction. What is important is what kind of macro policies are in place, and between the government and RBI, they are doing an excellent job, and you don’t need to worry that macro imbalances will happen if there is an external shock—at that point of time (if there is an external shock), India will look the best among emerging markets.
On the execution front, too, it has been excellent. We are now in a period where we are seeing the strongest reforms momentum, and the government is very sincere about making sure India is moving in the right direction. I’ve coined a special term on what India is transitioning into, and that is a ‘STAR’ economy—S stands for simple, T for transparent, A as in affluent and R meaning resilient. All the reforms India has done over the past 3-4 years can be clubbed into these four brackets.
When I say simple—the government has been trying to improve ease of doing business, redefine rules, and GST is in that direction as it will make the tax structure and administration more simple. If you think of the other reforms like deregulation of petrol and diesel prices, the e-auction process for allocation of resources, and then demonetisation—all these have improved transparency.
In the end, what has demonetisation done? It brought in more transparency into the system by reducing cash and incentivizing digitalization. If you think of ‘affluent’, the focus has come back to urbanization as a big goal for this government. If you look at the history of any country, including China, and if you want to be prosperous, then we have to increase the urbanization rate.
India’s focus on urbanization will help it become more affluent in the next 10 to 20 years. On resilience, if you think of what RBI has done in past 3-4 years, it has made the country more resilient by picking up more reserves, by being more conservative, by maintaining positive real interest rates, and this has helped the rupee. If you’ve seen what government has done on the fiscal side, despite there being concerns related to growth, the government has stuck to the fiscal consolidation agenda—the prudent measures by the government and RBI have made India more resilient. If the momentum continues, you will see a better and strong India in the next 5 to 10 years.
Structural reforms take some time to get reflected in macro numbers. There is a list of reforms India has done, which are not necessarily big-bang, and these small measures will reflect in due course. I am not concerned that we are not seeing a big jump in rankings when it comes to ease of doing business, because this is inevitably going to follow. As you know, the markets are going to lead expectations, and markets have already given a thumbs-up, and these ranking will improve. You will see a major change in the rankings for transparency after this demonetisation move. In my conversations with global rating agencies, they are very happy with the kind of measures that the government has been taking, especially macro prudence.
In Singapore, when people talk to you about India, what are their concerns?
One is the global-related risks that India does not have control over. Other is the dollar strength, and as it comes back in the second half, you will see a reversal of flows from emerging markets, and India could also be a part of it.
From India-specific risks, a few things I can think of in the near term are the monsoon rains... thankfully, we have a positive forecast from IMD (India Meteorological Department), but that risk remains. What kind of rural distress can come about if you have a bad monsoon?