 "Egregious own-goal if govt doesn't offer Rajan another term: Rajeev Malik")
With some uncertainty on an extension of the present Reserve Bank of India governor's term, Rajeev Malik, senior economist at CLSA, the Hong Kong-based broking and investment entity, gives his views on this and on the Indian economy, in a talk with Sheetal Agarwal. Edited excerpts:
Do you believe RBI governor Raghuram Rajan should run the central bank for one more term?
I feel it would be an egregious own-goal by the government if it doesn’t offer Rajan another term and also convinces him to stay on. This isn’t because he is indispensable but because he brings constructive, implementable ideas to improve India’s structural story. (Prime Minister Narendra) Modi’s cabinet isn’t bursting with talent that he can let go of the only Indian policy maker with immense international recognition and credibility, at a time when there is heightened global economic uncertainty. Unlike politicians, a central banker’s job isn’t to please all but to do the right thing in real time. Rajan’s policies and communication have undoubtedly enhanced investors’ confidence in India’s macro management.
Rajan, like Modi, is challenging the status quo—a must for structural change. Rajan’s approach, like Modi’s, understandably causes heartburn among some businesses and politicians. Those ticked off with Rajan for not cutting rates more aggressively perhaps don’t fully appreciate the nature of the macro imbalances being corrected, the importance of sustainable growth dynamics and the multiple transformational benefits of low and stable inflation. Whatever the decision on Rajan, the government should announce it sooner rather than later and ensure there is no undermining of the governor.
How would you rate the Modi government's performance in the past two years?
It has had some important successes, while work is in progress across multiple fronts. The cumulative positive impact of the incremental steps in several areas shouldn’t be underestimated. The key challenges are the pace and scope of the reform agenda. There are pockets of high energy but delivery overall has been slower than expected, prompting a healthy reset of the prior unrealistically high expectations.
There are important misses as well – absence of revival in growth, missing a turnaround in private capital expenditure (capex) and the disappointing pace and magnitude of job creation. Frankly, the 'oomph' factor, which reverberated in Modi’s stunning victory in 2014 has yet to be corroborated in widespread structural reforms. The government appears to have underestimated the complexity of its dysfunctional economic inheritance, while also having overestimated its ability to turn things around quickly.
Modi doesn’t have a magic wand and his success isn’t preordained. However, the emerging growth upturn, once the current uneven phase ends, will be more sustainable, of better quality and with fewer imbalances, compared with the unprecedented—but unsustainable—spurt during 2003-08. Investors and voters just need to be patient– Rome wasn’t built in a day.
What is your outlook on India's gross domestic product (GDP) growth this year? How will India stack vis-a-vis other emerging economies?
A lot will depend on the amount and distribution, both spatial and temporal, of rainfall. India’s growth is driven predominantly by private consumption; this is expected to continue. Based on the official GDP data, a favourable monsoon that boosts real GVA (gross value added) in agriculture, to grow by a faster five to seven per cent, could push up GVA/GDP growth to 8-8.3 per cent. Without that boost, growth is likely to be around 7.5 per cent.
The anticipated improvement in GDP growth is welcome but would be temporary at best. The more important factor affecting the sustainability of the growth rebound is still-subdued investment, due mainly to the weakness in private capex.
How much of rate cuts will we see this year?
If CPI (consumer price index) inflation remains well behaved and the monsoon is above normal, RBI might cut the repo rate by 25 basis points in August. That’s about it. India’s inflation target of around four per cent by early 2018 appears too ambitious, especially if aggregate demand recovers, as is expected. The government needs to get into overdrive to undertake structural measures that will ensure low and stable inflation. I’m disheartened by the lack of adequate effort by the government on this front.
What is your outlook on the rupee for this year?
Gradual depreciation to 70 a dollar by end-2016 remains our base line scenario. The rupee has a built-in depreciation bias because of India’s higher inflation, relative to its trading partners. Shifting global risk appetite will affect capital inflows into India and will affect the rupee/dollar price action. There is, however, an underappreciated positive in the balance of payments, in the increase in FDI (foreign direct investment) -- on a net basis, it exceeds the current account deficit. This increased reliance on long-term stable capital makes India less vulnerable (but not immune) to swings in volatile portfolio capital. The exchange rate is a relative price, so the rupee will also be affected by a stronger dollar.
Do you believe RBI governor Raghuram Rajan should run the central bank for one more term?
I feel it would be an egregious own-goal by the government if it doesn’t offer Rajan another term and also convinces him to stay on. This isn’t because he is indispensable but because he brings constructive, implementable ideas to improve India’s structural story. (Prime Minister Narendra) Modi’s cabinet isn’t bursting with talent that he can let go of the only Indian policy maker with immense international recognition and credibility, at a time when there is heightened global economic uncertainty. Unlike politicians, a central banker’s job isn’t to please all but to do the right thing in real time. Rajan’s policies and communication have undoubtedly enhanced investors’ confidence in India’s macro management.
Rajan, like Modi, is challenging the status quo—a must for structural change. Rajan’s approach, like Modi’s, understandably causes heartburn among some businesses and politicians. Those ticked off with Rajan for not cutting rates more aggressively perhaps don’t fully appreciate the nature of the macro imbalances being corrected, the importance of sustainable growth dynamics and the multiple transformational benefits of low and stable inflation. Whatever the decision on Rajan, the government should announce it sooner rather than later and ensure there is no undermining of the governor.
How would you rate the Modi government's performance in the past two years?
It has had some important successes, while work is in progress across multiple fronts. The cumulative positive impact of the incremental steps in several areas shouldn’t be underestimated. The key challenges are the pace and scope of the reform agenda. There are pockets of high energy but delivery overall has been slower than expected, prompting a healthy reset of the prior unrealistically high expectations.
There are important misses as well – absence of revival in growth, missing a turnaround in private capital expenditure (capex) and the disappointing pace and magnitude of job creation. Frankly, the 'oomph' factor, which reverberated in Modi’s stunning victory in 2014 has yet to be corroborated in widespread structural reforms. The government appears to have underestimated the complexity of its dysfunctional economic inheritance, while also having overestimated its ability to turn things around quickly.
Modi doesn’t have a magic wand and his success isn’t preordained. However, the emerging growth upturn, once the current uneven phase ends, will be more sustainable, of better quality and with fewer imbalances, compared with the unprecedented—but unsustainable—spurt during 2003-08. Investors and voters just need to be patient– Rome wasn’t built in a day.
What is your outlook on India's gross domestic product (GDP) growth this year? How will India stack vis-a-vis other emerging economies?
A lot will depend on the amount and distribution, both spatial and temporal, of rainfall. India’s growth is driven predominantly by private consumption; this is expected to continue. Based on the official GDP data, a favourable monsoon that boosts real GVA (gross value added) in agriculture, to grow by a faster five to seven per cent, could push up GVA/GDP growth to 8-8.3 per cent. Without that boost, growth is likely to be around 7.5 per cent.
The anticipated improvement in GDP growth is welcome but would be temporary at best. The more important factor affecting the sustainability of the growth rebound is still-subdued investment, due mainly to the weakness in private capex.
How much of rate cuts will we see this year?
If CPI (consumer price index) inflation remains well behaved and the monsoon is above normal, RBI might cut the repo rate by 25 basis points in August. That’s about it. India’s inflation target of around four per cent by early 2018 appears too ambitious, especially if aggregate demand recovers, as is expected. The government needs to get into overdrive to undertake structural measures that will ensure low and stable inflation. I’m disheartened by the lack of adequate effort by the government on this front.
What is your outlook on the rupee for this year?
Gradual depreciation to 70 a dollar by end-2016 remains our base line scenario. The rupee has a built-in depreciation bias because of India’s higher inflation, relative to its trading partners. Shifting global risk appetite will affect capital inflows into India and will affect the rupee/dollar price action. There is, however, an underappreciated positive in the balance of payments, in the increase in FDI (foreign direct investment) -- on a net basis, it exceeds the current account deficit. This increased reliance on long-term stable capital makes India less vulnerable (but not immune) to swings in volatile portfolio capital. The exchange rate is a relative price, so the rupee will also be affected by a stronger dollar.