India’s supply side capable of handling sustained 8% GDP growth: Sanjeev Sanyal

. I think growth momentum of 6.5 to 7 percent is pretty good. All the companies are making massive profits and their capacity utlisation has gone up very significantly, says Sanyal.

Sanjeev Sanyal, Member of the Economic Advisory Council to the Prime Minister of India, spoke to Moneycontrol about the benefits of India being included in the EM Global Bond Index and drivers for GDP growth in India.

Edited excerpts from the interview:

What are the immediate and long–term benefits of India getting included in the JP Morgan Global Bond Index?

This has been in the works since 2019 and is an important part of the evolution of the internationalisation of our financial system. In terms of benefits, right off the bat, we got a weightage of up to 10 percent, which accounts for around $ 24 billion. Also, once you're in one index, you typically end up in other indices as well. Once it's all done and dusted, we may get around $40 billion or even more over the next couple of years. This inflow is useful because it tends to be more stable. We need to remember that these are passive funds that are based on a certain weightage. JP Morgan itself is quite big, but there are others like FTSE and Barclays-Bloomberg. Once you are in there, it means that there is a relatively stable pool of money that we have access to. It's not 100 percent stable. If we don't manage our macro stability, then, of course, this will whittle away. But by and large, it tends not to get thrown off too much by global storms of any kind. The second impact is that it makes it cheaper for the Indian government specifically, and more importantly, the economy in general, to access money. In that sense, it makes bond yields in India lower than they would have otherwise been.

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A part of the equation in investing in emerging markets is the currency risk. So, even if growth and local returns are high, investors have to impute a 4-6 percent depreciation in the currency as part of the equation. Do you see that beginning to change?

Just because of this one inclusion, it is not going to change the way we manage our exchange rate. We are now a large economy - $24 billion here or there is not going to change the trajectory of the exchange rate. We have, after all, more than $600 billion worth of foreign exchange reserves already. So, let's not act like this is going to change the game. This is additional good news. The Reserve Bank has had, for a long time now, a well-established way of managing the exchange rate. We basically allow it to find its own level but do not allow it to move too fast in either direction. We lean against the wind and manage volatility. And we have more than adequate reserves for that purpose. So, my view is that (this) particular way of managing the exchange rate has suited us well for a long time. There's no particular reason why we will change the way we do it. How will the rupee behave as a result of this? It will continue to behave the way it does, which is that over long periods of time, it adjusts for real effective exchange. But do remember that the Indian rupee, since the imposition of the inflation targeting framework, the differential between our inflation rate and that of the rest of the world has become much narrower. In the old days, we had to depreciate by around four percent every year against the dollar to maintain the real effective exchange rate. My sense is that that number is probably much smaller now since we are no longer a high-inflation country. For much of the last couple of years, our inflation was lower than that of many Western countries. So, we will continue to manage it the way we are managing it. But the result of it would mean that the rate at which we depreciate will probably now be lower than in the past.

For this year, RBI forecasts GDP growth of 6.5 percent. What do you think is a growth that we can achieve for the next two to three years? What could be the big drivers?

As the government has said, we expect growth somewhere in the range of 6.5-7 percent this year. I think we are on course for doing that. The first quarter came up at 7 percent. While it's helped by statistical factors, those statistical factors will also even out over time. So the headline number will come off, but that doesn't mean the economy is decelerating. Our growth numbers are pretty robust, the purchasing managers index is strong, and there are large industries, for example, travel and tourism that are booming. Even on the private sector side, you can see significant investment happening. Even manufacturing is seeing investments going in. And of course, the public sector's infrastructure push continues to happen. Whether you live in Delhi or you live in Mumbai or any other city, you will be seeing construction everywhere all the time. I don't think it requires too much imagination to see that our growth momentum is fairly robust. In the medium term, we would like to grow at something like eight percent on a sustained basis. That is not possible this particular year because the rest of the world's growth dynamic is very weak. So, if we try to push for eight percent growth this year, then we will unnecessarily stress our external accounts because our imports would go up, but our exports wouldn't. So, under those circumstances, I think 6.5 to 7 percent growth is good. Longer term, it will obviously depend on what happens in the rest of the world. Our own supply side is capable of managing eight percent on a sustained basis. It's no longer the case that our infrastructure would blow up if you try to push growth. Our banking system is now clean and is capable of sustaining eight percent growth. So our systems internally are now capable of driving an eight percent GDP growth rate.

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If you look at the past two to three years, post-COVID, much of the heavy lifting clearly has been done by the government. Do you think it’s time for private capex will come and do the heavy lifting here on?

I think a growth momentum of 6.5 to 7 percent is pretty good. All the companies are making massive profits and their capacity utilisation has gone up very significantly. I cannot see why companies would not be investing. In fact, from every meeting I have with the private sector, I gather that they are already investing or will be investing. Mostly, growth is driven by the private sector. The government can lean against the wind sometimes. And of course, the government needs to invest in infrastructure, which we are doing. And we'll do more, but ultimately, you know, the real kicker in the growth has to come from the private sector and the private sector is doing its bit.

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