Global headwinds while important are of lesser significance to India, says Gita Gopinath, professor of economics at Harvard University. Hence for India to grow at 8%, it needs to revive domestic investment, she opines
With the exception of India, emerging markets as a block have slowed down, says Gita Gopinath, professor of economics at Harvard University. A couple of factors have worked in favour of India, including the fall in commodity prices and China slowing down.
On the other hand, resumption of the US Federal Reserve hiking interest rates will have implications for India in terms of global borrowing costs rising, she says.
According to her, global headwinds while important are of lesser significance to India. Hence for India to grow at 8 percent, it needs to revive domestic investment, she opines. "Corporate investment in India has flat lined after peaking in 2011. It will once again resume once the reforms process kickstarts, including the passage of the Land Bill, the bad loans situation comes under control and nominal interest rates come down," she told CNBC-TV18.
She further adds that public sector investment cannot be a solution for India's investment problem. Gopinath also does not find any merit in deviating from the fiscal deficit path. As far as inflation goes, she believes India will remain on target.
Below is the verbatim transcript of Gita Gopinath's interview with Latha Venkatesh on CNBC-TV18.
Q: Tell us how the global economy is panning out next year. Will it again start with forecast of 3.5 percent growth and end with a growth less than 3 percent or will the run of weakness end and we will see a better economic growth?
A: The world economy is moving to two tracks of growth. There is going to be the advanced economies that have come out with the financial crisis of the last eight years and are now recovering.
You have emerging markets, on the other hand, that were previously the drivers of global growth that have, as emerging market block, slowed down. The exception here is India, which looks more promising than the other Brazil, Russia, India and China (BRICs) nation but we are going to expect to see these two tracks of growth in the near-term. After three-four years that will revert.
If you pause to think about the main global trends that lead into 2016, I think there are four -- looking at it from the perspective of India. The first is the whole collapse in commodity prices, which is a net good for India.
The second is the slowdown in growth in China, which had global implications. From the perspective of India's exports, it has more negative effects because it is only 4 percent of India's exports that go to China.
Third is the resumption of Fed tightening, which is going to happen at a slow pace but that has implications of borrowing cost for India internationally.
Fourth is weakness in advanced economies, though they are so called rebounding, there is still weaknesses, which should impact demand for Indian exports.
Q: In that case, can you be that confident of the Indian growth story? How many basis points higher? Will we grow half a percentage point faster, do you get to 8 percent at all?
A: For India to grow faster, we should be very clear that the headwinds coming from the rest of the world while important are of a much smaller magnitude than they are for most other countries in the world. Like I mentioned, if you look at emerging markets group, the collapse in commodity prices, the collapse in China demand is much more problematic for countries like Brazil and Indonesia and Turkey than it is for India.
So for India to move towards 8 percent growth what it needs to do is revive domestic investment and that is one area where I haven’t seen much of a change. If you look at the last 16 months in the Modi government, there have been positive signs but if you look at corporate investments, private sector investments in India by domestic corporates, that has flat line, that peaked in 2011 and that is flat line.
There are a few factors for that that needs to be addressed. the first, the promised big reforms including land acquisition do not come about, that has to be pushed.
The second is you have the problem with bad assets of banks that have basically those collapse in lending and you have been incorporated or heavily indebted and that will lead to a decline in investment.
Third is with all the success that Reserve Bank of India (RBI) have had by bringing inflation coming down but without normal interest rates having come down commensurately for good reasons, the real borrowing cost is still quite high. So if you want to think of heading towards 8 percent growth in 2016, you need to have these three factors addressed.
Q: A part of it was addressed in the media review but the hint from the Chief Economic Advisor was that we probably have to give up on the fiscal prudence timetable. The stock of debt as a percentage of gross domestic product (GDP) has gone higher and the prescription is that it should be pushed even higher. In any case is that the only way or a good way to push up investment?
A: Indeed with private investment not taking off, the hope is that public sector investment will step in but that cannot be the solution to India's investment problems. On one hand, India has had a few fiscal blessings with commodity prices coming down. So you will think of this is a good time where one should consolidate the fiscal deficit.
Spaces that need to be addressed are structural. There was a period right at the peak of the crisis, when there was a big fiscal expansion and that endangered high inflation, that put in high inflation in process so we don’t want to return to that where because of weaknesses coming from the private sector, the government's access steps in and that generates this excess demand in the economy and inflationary impact, which I don’t see a reason to go in that direction at all.
Q: That also brings into conflict the RBI given its new responsibilities towards inflation under the monetary policy framework if indeed fiscal deficit were to rise. In that context, how do you see the monetary policy committee working? Do you see it coming in the first place because it requires an amendment and secondly, is that a disturbance how should the market or the economy prepare the committee?
A: Just to get back to your question about the fiscal deficit, I don’t see an argument for moving the target. I think that it is important to stick with the target that is in place. It has taken a long time for India to build credibility as having fiscal discipline and that should be maintained.
The monetary policy committee is a good idea in the medium to long run. It is the way most policymaking is done in the rest of the world. So it is useful to move towards that model of course you have to make sure that you have the right mix of people on the committee and that the right policymaking gets done and things are not gridlocked. So I don’t see a need to rush for it at this point but it is certainly something to move to in the medium to long run.
Q: Given the policy impulses announced so far and the growth trends that you can see both globally and domestically what is your own inflation trajectory? Does RBI get to the 5 percent mark in January 2017, would you pencil in rate cuts in 2016?
A: An important factor has helped with bringing in inflation down is commodity prices and the projections of commodity prices is that that they will not rise back up dramatically in the next year for sure. So that can help India attaining its target with inflation.
But of course there are always headwinds that can come about. So we haven’t seen much rupee volatility in response to the Fed tightening but that can change if there is some concern that the Fed want to tighten faster then that can an effect on the rupee and through that on inflation -- there is a very tight link between those two but with the policies in place, the best is being done and so there is reason to be optimistic that inflation will stay on target.
Q: I was wondering if you can give us an idea of how many rate cuts one should expect at all other circumstances?
A: I was thinking about that myself too. On the one hand just in terms of the real cost of borrowing, if you look at the trend in the real cost of borrowing, it is quite high at this point. So that would mean arguments for cutting interest rates. We will obviously look at the inflation expectations, I am concerned about those measures for India but if you look at wholesale price inflation in manufacturing, that is 1-2 percent and so with the rates at 7-7.25 percent -- these are high real borrowing costs. So that would give you an argument for cutting rates gradually over the next year.
The one headwind that I do worry about is what is happening to the rupee. The rupee still doesn’t seem to be on a strengthening trajectory. So if there is further depreciation of the rupee coming out of international events, that can have the opposite effect in bringing inflation up.
So on net, I think it would be good to see a few more rate cuts.
Q: What does the global financial scene look like next year? In 2015, we had heart attacks from China in June first from the stock markets then a renminbi depreciation albeit small but when it came it didn’t look like it was the only one, it looked like the first of many. What should global markets or at least Indian financial markets prepared for in 2016 from the world?
A: Indian financial market should prepare for turbulence going forward. The reason I say that is because the global economy, while recovering in some areas, is bumping close to the bottom which means that things can go bad relatively quickly. If you look at the pockets of growth, the US economy looks like it has relatively 2-3 percent growth but if you look at euro area, Japan, they are all relatively weak. If you look at emerging markets, most of the BRICs nation with the exception of India look very weak.
So we are bouncing at the bottom which means that there is a possibility of bad news coming out of China, there is a possibility of euro trigger event to euro that questions the existing of the euro area. So we are headed for 2016 being a year with fair amount of uncertainty and turbulence.