'Ratings downgrade possible; inflation worrying'

Policy paralysis has hampered the economy and Ruchir Sharma of Morgan Stanley believes it is essential to stop any further harm and not expect big reforms that can transform the economy. He further added that though, the possibility of a ratings downgrade remains, the market is always ahead of that. According to him, the worrying factor is the inflation data.

"When I first came out with a book few months ago and on most countries, I was pretty categorical (in terms of) bullish or bearish chance to being a breakout nation. On India I did 50-50% because I am genuinely conflicted. But the response was very interesting. When I said 50-50%, the initial response here was the fact that you are being too pessimistic about India. Today, people say 50% you are being too optimistic about India. So, the swing in sentiment has been rather dramatic to me. In India often the truth lies somewhere in the middle. So, I feel that the expectations adjustment has been pretty swift in India and that’s good news and I can't believe that policymakers have also not adjusted to, I think they have," he told CNBC-TV18 in an interview.
 
Below is an edited transcript the interview on CNBC-TV18.

Q: What is it that you would actually like to see in terms of reforms from the Indian government if we were to try and get out of this 5% trap that we are going to be getting back into?

A: No at 5%, may be like 5.5-6% is what I said. I don't even know whether -this is something which in fact a tennis coach, like a legendary tennis coach in a conversation once told me, he said that when a player is down often the tendency is to just hit out. Basically just get back in the match hit out etc. The right approach is, you take it one point at a time, you sort of play yourself back into the game.

Something similar is true of Indian policy as well that what we need to do first is stop doing any harm. So, even the first objective now seems to be that let's go back to where we were on February 28 before we had a terrible budget, lets reverse all those steps first then lets take it. In India's case its about lets stop doing any harm, lets reverse some of the damaging stuff that we have done over the past few months and not expect any big bang reforms which is going to transform everything in a second because those sort of sentiment swings are never healthy.
 
Q: But is ratings downgrades for India now a real threat because talk about fiscal consolidation plan or atleast a credible fiscal consolidation plan, we don't seem to have one. We cant move on diesel subsidies given our political context, in that scenario do you believe that a ratings downgrade for India is a real possibility now?

A: It could happen, but my honest truth is that the market is always ahead of ratings downgrades, this is true across the world. So, I am not that concerned about significance of ratings down grade. You are right that the fiscal situation is out of control. I love making comparisons between India and other emerging markets.

As far as fisc is concerned we are running a fiscal deficit today that is three times the emerging market average. That is a concern. In terms of ratings downgrade, significance of that etc I just feel that people see through that. So, I am not that concerned about the significance of that.

We need to just be more concerned of the fact that, how do we atleast make sure we grow with the global average which is the kind of theme that we have done for the last three decades. Let's stick to that. To me the inflation data is in fact more worrying because on growth if you look at it, India's ranking of the 180 economies, in the 1980s our ranking was about 26 out of 180. 1990 our ranking on growth in the global economy was 26.
 
Last decade our ranking on growth was 25 and this year even if we grow at 5.5-6% our ranking will be in the same ballpark of 26. So, its amazing how we have just grown with the world. Where we seem to have gone completely out of sync with the world is inflation. On inflation our average ranking used to be about 80 or so in the 1980-1990s. Last two years our average ranking out of 180 economies is 150. To me that is something which is a bigger concern. No economic success is sustained with high inflation.
 
Q: Do you believe that there is a case of corporate India pressing for the Reserve Bank to cut interest rates at this point in time or given where we actually see inflation and its been stubborn right through, do you believe that the Reserve Bank is right on not moving on interest rates?

A: There are two separate debates here. One is, is inflation a problem in India? It absolutely is. To me it is a bigger problem than even growth just now in terms of our relative rankings. The second debate is much more academic. Can monetary policy do something about inflation or it can't?

This is where the intellectual debate goes on. I really think that the bigger fault lies with our spending habits rather than to do with the interest rates policy out here. You cannot keep spending as you said you can’t keep writing cheques which a country can’t cash. The average spending in India has been growing – government spending about 15% a year ever since the UPA came to power in 2004 before that it was more like 10-11%. To me that is the fundamental problem.