 "Monetary policy cannot fix all problems: Sanjeev Sanyal")
Sanjeev Sanyal, global strategist of Deutsche Bank, says a central bank must try to curtail inflation before it attempts to revive growth. In an interview with Somasroy Chakraborty, he emphasises the need for sustained reforms to attract foreign investments and encourage domestic business growth. Edited excerpts:
Will India's fiscal problems lead to a sovereign rating downgrade?
In my view, a sovereign rating downgrade in itself is neither a major issue nor an immediate concern. It may be the symptom but it is not the problem. I am far more concerned about efforts to push supply-side reforms and the persistent deficits in the fiscal and current accounts.
Is India's reform push too little, too late?
Are foreign investors wary of investing in India?
There has been a slowdown in reforms for several years and a number of scandals. One cannot deny that overall outlook has been affected by these events. Nevertheless India's demographic boom will last from 2015 to 2045. If one takes a long-term view, say 5-10 years, foreign inflows would ultimately come to India if governance and policy conditions are friendly and stable. We need capital and the rest of the world has excess savings, it is a natural fit. In order to be a credible place to invest, however, we will need a continuous process of reform. These reforms have to be stable and need to be sustained over a long period of time. Incidentally, all of the reforms that would attract money into India are also needed for domestic investors. I don't believe that foreign investors need special treatment in this country. Improved infrastructure, a simple tax system, good municipal management and a reliable, speedy judiciary – all business needs them whether they are local or foreign.
Indian industries have been demanding a rate cut to accelerate economic growth. Should the Reserve Bank of India cut rate aggressively to revive growth despite high inflation?
If it has to choose between growth and inflation, the central bank should try to first curtail inflation. There is enough evidence from economic history that a central bank's first mandate is inflation control as it can be very difficult once inflationary expectations get anchored at the wrong level. This is particularly true when the constraint to growth is not demand but supply side issues. It is not the central bank's job to revive growth if there are supply side constraints and the economy has an inflation problem. Broader economic measures are needed to resolve this situation and RBI cannot resolve all national problems through monetary policy.
BRICS countries plan to set up a development bank. Will the proposed BRICS bank enhance credit access for developmental projects in India?
Intrinsically, there is nothing good or bad about having a BRICS bank. We need to see how it is used. For example, China is generating huge amount of excess savings. If the BRICS bank uses these resources and invests in say Indian infrastructure sector, it will be a good thing. But I think at this moment there is not much clarity on how it will function, where it gets its funds and what actually it plans to do. It is too early to say anything.
Where is the rupee headed?
I think there is a serious issue on the current account side. India has a large current account deficit and this places a downward bias on rupee in the long-run.
What are your views on the Cyprus bail-out?
The Cyprus issue does show that still there are underlying weaknesses. But even in Europe, more reforms are getting implemented slowly but steadily, certainly more than what people give them credit for. Whether or not you agree with specific measures, the Cyprus bail-out shows an attempt to resolve the problem head-on rather than allow it to fester forever.
How do you assess the developments in the US?
The US seems to be on a stronger footing and recovering much faster than Europe. It is becoming increasingly clear that the US economy is resolving its underlying debt problems. The sequestration is forcing a fiscal correction. It may pain now but if you are taking a long-term view it shows that the American system works – when the political system cannot deliver a course correction, the system institutionally forces a correction. It may not be the very best way of doing the fiscal correction but it is much better that letting debt rise without limit.
How do you compare India with China?
At this moment Chinese economy is much bigger and more advanced than the Indian economy. However, India has many things going for it in the long-run. China is entering its demographic decline phase. India, on the other hand, will enter its demographic boom period in next couple of years. The two countries are in opposite demographic phases. Nevertheless, to take advantage of the opportunities, India will need serious policy efforts. There is no God given right to growth, economic success has to be earned.
Will India's fiscal problems lead to a sovereign rating downgrade?
In my view, a sovereign rating downgrade in itself is neither a major issue nor an immediate concern. It may be the symptom but it is not the problem. I am far more concerned about efforts to push supply-side reforms and the persistent deficits in the fiscal and current accounts.
Is India's reform push too little, too late?
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Clearly, India is a supply constrained economy. Growth has slowed down, and yet the current account deficit remains wide and inflation is still persistent. It is not a demand side problem. If we want to resolve this situation we need sustained reform measures over a long period of time. I think discussions now need to focus on issues that have not even been put on the table. We need to reform our legal system, property rights, labour relations and municipal system. There are some discussions on the GST (Goods and Services Tax) but we are silent on the Direct Tax Code. Running a business in India is a complicated task. We need to look at the small regulations, the sub-clauses and focus on resolving nuts-and-bolts issues. One or two isolated efforts will not reinvigorate the economy nor change the impression in the minds of domestic and foreign investors.
Are foreign investors wary of investing in India?
There has been a slowdown in reforms for several years and a number of scandals. One cannot deny that overall outlook has been affected by these events. Nevertheless India's demographic boom will last from 2015 to 2045. If one takes a long-term view, say 5-10 years, foreign inflows would ultimately come to India if governance and policy conditions are friendly and stable. We need capital and the rest of the world has excess savings, it is a natural fit. In order to be a credible place to invest, however, we will need a continuous process of reform. These reforms have to be stable and need to be sustained over a long period of time. Incidentally, all of the reforms that would attract money into India are also needed for domestic investors. I don't believe that foreign investors need special treatment in this country. Improved infrastructure, a simple tax system, good municipal management and a reliable, speedy judiciary – all business needs them whether they are local or foreign.
Indian industries have been demanding a rate cut to accelerate economic growth. Should the Reserve Bank of India cut rate aggressively to revive growth despite high inflation?
If it has to choose between growth and inflation, the central bank should try to first curtail inflation. There is enough evidence from economic history that a central bank's first mandate is inflation control as it can be very difficult once inflationary expectations get anchored at the wrong level. This is particularly true when the constraint to growth is not demand but supply side issues. It is not the central bank's job to revive growth if there are supply side constraints and the economy has an inflation problem. Broader economic measures are needed to resolve this situation and RBI cannot resolve all national problems through monetary policy.
BRICS countries plan to set up a development bank. Will the proposed BRICS bank enhance credit access for developmental projects in India?
Intrinsically, there is nothing good or bad about having a BRICS bank. We need to see how it is used. For example, China is generating huge amount of excess savings. If the BRICS bank uses these resources and invests in say Indian infrastructure sector, it will be a good thing. But I think at this moment there is not much clarity on how it will function, where it gets its funds and what actually it plans to do. It is too early to say anything.
Where is the rupee headed?
I think there is a serious issue on the current account side. India has a large current account deficit and this places a downward bias on rupee in the long-run.
What are your views on the Cyprus bail-out?
The Cyprus issue does show that still there are underlying weaknesses. But even in Europe, more reforms are getting implemented slowly but steadily, certainly more than what people give them credit for. Whether or not you agree with specific measures, the Cyprus bail-out shows an attempt to resolve the problem head-on rather than allow it to fester forever.
How do you assess the developments in the US?
The US seems to be on a stronger footing and recovering much faster than Europe. It is becoming increasingly clear that the US economy is resolving its underlying debt problems. The sequestration is forcing a fiscal correction. It may pain now but if you are taking a long-term view it shows that the American system works – when the political system cannot deliver a course correction, the system institutionally forces a correction. It may not be the very best way of doing the fiscal correction but it is much better that letting debt rise without limit.
How do you compare India with China?
At this moment Chinese economy is much bigger and more advanced than the Indian economy. However, India has many things going for it in the long-run. China is entering its demographic decline phase. India, on the other hand, will enter its demographic boom period in next couple of years. The two countries are in opposite demographic phases. Nevertheless, to take advantage of the opportunities, India will need serious policy efforts. There is no God given right to growth, economic success has to be earned.