Samvat 2074: Economists say growth likely to be around 7-7.5%

Sanyal says the government has introduced enormous number of potentially painful reforms over last couple of years but worst of pain may have now got busted and growth numbers seem to have stabilized and hopefully form here on they will pick up.

Below is the verbatim transcript of the interview.

Q: What is the sense you are getting about the lead indicators of growth? We have had five quarters of falling gross value added (GVA). Will the second quarter whose numbers we have not got, that is the June-September quarter, be different?

Goyal: Yes, I think the leading indicators suggest that. There was some short-term effects of perhaps goods and services tax (GST) and these look like they are being overcome, so we should see a somewhat better performance. But, overall I think something more needs to be done to reach our potential growth rates. That is not going to follow instantly and by itself.

Q: Five quarters of a falling GVA, but the lead indicators as Ashima is pointing out, Index of Industrial Production (IIP), core sector for August as well as the export growth for September at 26 percent, are these convincing you that the second quarter onwards we are growing higher in terms of GVA?

Ahya: Yes, absolutely and I would add one more indicator to this that the Purchasing Managers' Index (PMI) has also bounced back, manufacturing as well as non-manufacturing. So we do think that the economy has seen the worst in terms of at least the official stats. Though, by the way, I would say that if you look at corporate revenue growth for first and the second quarter, there wasn't so much of dip as it was showing in the gross domestic product (GDP) data, so there is anyway a question mark in terms of the underlying trend in the economy – was it really as bad as the GDP was showing. But nevertheless, you did list a few indicators and they were showing some weakness and now, they are all bouncing back.

We think, yes from these indicators' perspective economy is going to do better, but at the same time, if you even analyse it from the framework perspective, what we have had is either exports are good or consumptions are good in the last almost 4 years and we have never really had a synchronous improvement in exports and consumption whereas going forward, we are going to see that and I would say that the best month for that was August, 2017. Up till that, we had some or the other problem holding either of these two line items and you really need these two line items to do well to improve capacity utilisation so that eventually the corporate sector feels confident to do investment.

Q: What is the number you are working with for the second quarter in terms of GVA? Will it be better than 5.7 as well second half, what are your projections?

Ahya: For the second quarter, we expect it to be at 6.5 and from there on, we will see the second half of the financial year will average above 7 percent. And for the full year, we are at 6.7 percent in this financial year. The coming financial year, we expect growth to be at 7.5 percent. So, the official statistics will show a clear acceleration from here too.

Q: One of the numbers that seem to have thrilled a lot of people and Ashima and Chetan have kind of referred to it, this export number of 26 percent. Is that convincing enough? We have had 20 billion of exports monthly for quite some time now. This 28 billion, should we take it as convincing or is it just some lag orders blocked by GST now getting implemented? Do we still have to wait for evidence that the slowdown, the disruption is over?

Sanyal: First of all, let me say that just like people who are overreacting to number printing down a bit, one month of upward number also should not sway us too much. So let us wait and watch if the trend turns or not. Just like you asked me when there was all this panic about GDP numbers, I was calming people down, I would apply the same logic on when numbers begin to pick up. These things are not straight line movements and you need to look for several months before you can tell the trend, but yes, overall it does seem that the deterioration in growth momentum seems to have stabilised. Whether or not they pick up, we will see. I will leave Chetan to try and forecast that.

Q: Is the non-performing asset (NAP) problem really over? We have just got the Axis Bank numbers and NPAs are a historic high for the quarter gone by. It looks like, from what Axis Bank tells us, this is nine accounts which go across all banks, so we are going to get these kind of numbers from other banks as well and telecom has not even begun, they have not even started recognising the Aircels and the Videocons entirely. So, is the worst really over in terms of the financial sector's pain?

Sanyal: The point is that the problem is being properly recognised for the very first time. This evergreening, misallocation of capital has been going on for decades, maybe from the time of independence. And for the very first time, while there were clean-ups in the past, this is the very first time that we are really cleaning it up and in many cases, forcing it through the newly set up National Company Law Tribunal (NCLT), forcing recognition of the problem. We should not confuse recognition of the problem with actually having the problem. Surely, recognising and properly accounting and provisioning for the problem should be seen as progress, not regress.

So I think this is part of the pain that is being imposed but I am surprised many people say the NPAs have gone up. No they have not actually. They were always there. We just did not recognise them as such.

Q: My only point is if we are still going to get higher and higher NPAs with each passing quarter, can that stymie growth? That is the question. This twin balance sheet problem, infrastructure companies hamstrung and a large number of the banks still having to take the better part of their profits and provide for losses. Will this keep us from really getting on to even 6.7 percent growth that the RBI has forecasted for the full year?

Goyal: One hopeful issue is that resolution now with this deadline imposed under the bankruptcy court, it is in banks' interest to agree to a haircut and let the ownership change or let the assets be revived. So that is one hopeful issue. And the second is that since inflation now has been persistently below the inflation target, there is scope for rates to come down because you have had extreme macroeconomic tightening, you could say stability. But the stability has come at the cost of tightening which actually reduces the denominator and therefore, raises NPAs. So if you see some more macroeconomic stimulus that will also help resolve this issue.

Q: This is what Ashima is telling us that the economy is constrained by high interest rates and that a lower interest rate regime is needed for a higher growth. Do you see the need for lower rates and do you see the space for it?

Ahya: Firstly, I believe that growth is not doing as badly as what the official GDP statistics are showing, but in any case, it is true that the growth has been somewhat weak. Then I would say what is the problem and why is growth weak? And that has essentially little to do with the monetary policy. The reason why growth has been weak is because we have been first adjusting like all other emerging markets in terms of bringing our macro stability back. We had to tighten fiscal policy, we had to have tighter monetary policy, so from that point of time, we have seen improvement in growth, but it got held back first by exports, then demonetisation, then GST.

So when you look at the reasons why growth has been held back, I do not think monetary policy has a key role to play here. We think anyway worst of all those one off problems as well exports, etc. is now behind us. So growth is going to recover. So we do not really think there is a need to see rate cuts from RBI.

Q: You think that the real rates are way too high? Is there space, as Ashima is suggesting? And also the fisc, should the fisc also oblige and do a little more capital investment than the numbers now allow?

Sanyal: Our view, the Finance Ministry economists view on interest rates is well known, so I am not going to repeat that.

Q: Which is that you think there is space for rate cuts?

Sanyal: Perhaps so. The point here is that it is ultimately up to the RBI to take a call on it and not us. Our Chief Economic Advisor, Arvind Subramanian and even I have, in the past, expressed our views on it. I am not going to dwell on that. I would much rather get to another issue which is perhaps a key to getting growth going.

When you say fiscal, yes you can perhaps introduce a little bit of space, maybe there for some more spending or at least allowing for slippages that may be there because of GST collections or whatever. But really, if you want sustained growth, you have to recapitalise the banks and get them to lend again. Ultimately any sustained economic cycle will have to require the private sector investment to be sustained and that will require the banks to lend again.

Now, while I mentioned that we have carried out a major cleaning up, using particularly the bankruptcy and NCLT system, the fact is we are clear that it does impose a degree of pain on the system. So now that we have introduced some order, we need to take the next step and recapitalise the banks and get them to lend again for which of course, many options are there, but I think this should be high on the priority of economic policy making.

Q: I want to contest that point as well which you are repeatedly saying that we have taken reforms which have meant pain. I would actually say that is GST all that painful? It is disruptive in terms of a new accounting system and getting people outside the tax system to come in, but real painful reform is for instance labour reform. Real painful reform or difficult reform would be privatising the public sector banks. Ashima, you began this entire conversation by saying we are nowhere near our potential. Do you think that that is the bullet to be bitten, privatising the public sector banks, changing the way they do business, changing the grammar of business of public sector banking?

Goyal: First, infuse capital and get their balance sheets to be healthy before you think about privatisation because that is what involves an enormous upheaval in the system when currently it is going through too much upheaval. Just a point on this capital infusion versus a rise in demand because you talk to any banker now, you know that they are holding excess statutory liquidity ratio (SLR) of almost 8 percent. So the point is they have funds even today, but there is no demand for funds. There is no demand for credit. So therefore there is scope to increase lending if there is a demand turnaround. And definitely improvement in governance is absolutely essential, but the whole process of imposing deadlines, haircuts, faster decision making, is some reform in the way these banks function. And overall, for any banking system diversity is helpful.

Q: But I really want to come back to whether the taxpayers' money should be always put on the line. Is it not a better idea to at least on an experimental basis privatise some of the banks or are they going to lead all our public sector banks to becoming MTNLs and Air Indias?

Sanyal: First of all, as you may be aware that this government has already stepped into the path to privatising Air India. So it is not a government that is in principle against privatisation. And indeed, government may pare down some of its stakes in the private sector banks, up to 52 percent without even needing to privatise. At this stage, what we need to do is to stabilise and reinfuse capital into the banking system. So we need to get it going. The amounts of capital required to entirely privatise some of the larger banks, maybe some small banks also will get privatised, but if you want to get serious about it, at this stage, given the pricing and the amounts of capital required, it may not be practical.

In theory I agree that maybe too much of India's banking system is taken over by public sector banks and I am entirely in favour that a larger part should be private, whether through the growth of the private sector or selling down, we can debate. There needs to be diversity. I am not incidentally of the view that unlike hotels or airlines, I think there is a space for public sector banks in banking. They bring their own problems but private sector banks have their own problems as we found out in the crisis of 2007-2008.

So, they have different problems and so, as was just mentioned, keeping a reasonably diverse banking system with different types of ownership is probably a good way of going about it. So I am okay with some selling down of stakes which by the way may be one way of raising money for the recapitalisation, but I do not think we are in the state where we are going to wholesale privatise the banks. Now that is not what we are contemplating at this stage.

Q: What is your sense? What kind of a growth are you seeing over the next four quarters? Will we average well over 7 percent and what is that one factor you will want from the government? Would it be a higher fiscal deficit?

Goyal: I think we could reach about 7 percent at present, but not necessarily a higher fiscal deficit, but improved composition of public sector spending and intelligent use of extra-budgetary resources to increase investment as well as in general, improving the supply side which will keep inflation down giving room for interest rates to come down which can provide a real fillip to demand and to growth.

Q: Do you think all good things have happened now and the fruition will come in FY19 and we are going to get a much better rate of growth? What would that number be?

Sanyal: I have to say that we introduced the enormous number of potentially painful reforms over the last couple of years, but I think the worst of the pain is being felt now or we may have even gone past it. The growth numbers seem to have stabilised and hopefully from here on, they begin picking up. In the end, we have to think in terms of having 20-30 years of sustained high growth rates. So a few quarters of slowdown here or there will not matter.