One-year on, experts still upbeat on Modi govt

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Below is the transcript of their interview with Shereen BhanQ: Let me ask you for your assessment of the hallmarks that the Finance Minister has presented at the achievements of the government’s first year performance?Sheth: If you look at the performance of the government, there are two ways to look at it. One is the government as an executive authority and two is the government that participating in the parliamentary process.The second part getting major bills passed through parliament has been mixed some bills like those related to foreign direct investment (FDI), those related to insurance, defence etc, the mining bill have indeed been passed. Some of the two big marquee bills which is the goods and services tax (GST) and the land acquisition haven’t.The first part that I was referring to which is the executive authority of the government, I think they have used that fairly well. They focused on increasing the ease of doing business in India. They have used foreign policy also to meet their economic agenda. They have allocated the inflation targeting authority to the Reserve Bank of India (RBI) which we think is positive as well. So from that perspective, the executive authority has been used quite well.Q: The highly praised government sources are telling us that their a bit disappointed or surprised with the reactions coming in from Corporate India though not much has changed on that ground at this point in time. In fact if I can quote a very senior minister who told us that this image that the oppositions claims that the government is pro-corporate and the perception in Corporate India is that this government is anti-corporate. So where does the truth really lie and how would you asses the performance of the 12 months that this government?Godrej: The 12 months of the government has gone off really well. The finance minister enunciated it extremely well. Clearly macro-economic, most of the macro-economic issues have been out; fiscal deficit, current account deficit, the rupee has stabilised, our total foreign exchange reserves have risen. So overall macro-economically India is in a very good position. As far as on the ground, things are recovering, but they are a little slower than expected. But I expect in about two quarters, we will be back t6o very strong on the ground functioning. And if the goods and services tax is passed and implemented by April 1, I expect we can be in double digit gross domestic product (GDP) growth in the next financial year. So, overall I am very happy with the way the year has gone and the government is doing a very good job.Q: You talked about a revival as far as the investment in capex cycle is concerned two quarters down the line. Once again I go back to what our sources are telling us within government that there is a problem of broken private sector balance sheets, there is also a problem of the banking sector having been squeezed as far as non-performing assets (NPAs) are concerned but now the finance minister saying that it looks like the downside or the down cycle for NPAs – this could perhaps be the bottom and we could see things improving. We have got credit policy coming up on the June 2 and I know that the government is very keen that the Reserve Bank of India (RBI) should act more aggressively. What is your expectation now?Godrej: There should be reduction in repo and reverse repo rates. I think wholesale price index is now in negative territory, the consumer price index (CPI) is also going down, global commodity prices are in reasonable control, so the right time for the RBI to further reduce the repo and reverse repo rates and overall growth is going to accelerate, so generally the country is in good shape and we must remember that already we are the fastest growing major economy in the world today. We are growing ahead of China in terms of gross domestic product (GDP) growth.Q: A lot of achievements being highlighted there by the Finance Minister – subsidy reduction, rationalisation, social security schemes, addressing the fiscal situation, improving the macros, infrastructure spending, defence procurement norms being re-jigged. What to your mind has been the single biggest achievement of this government in order to get the economy restarted, stabilise the economy and get growth back?Chaudhuri: The single biggest achievement of the government is actually being in the government. That has in a sense changed the ground conditions and created condition for a let us say a break with the last three years of the UPA which unfortunately saw the slowdown beginning. However, Modi’s plan seems to be more long-term or let us say more medium-term. So, the initiatives that he is focused on like ‘Make in India’ etc aren’t going to yield dividends overnight. They are two to three year plans. When they come up they will be very good. So, some of the expectations people had that there would be very early and very sharp recovery got belied.There is a possibility that it might have happened but since Modi’s essential approach was that he would like to do it in different way and that different way then takes time. There were certain things that they inherited three years of bare economy, bank balance sheets being bad. One of the comparisons that can be usefully made is Modi’s first year and the UPA-I’s first year. UPA-I actually had been in government, Manmohan Singh had been Finance Minister, in a sense they were going to continue the old way of doing things. It did give very good results and they were far more familiar with the terrain. Bank balance sheets were actually quite strong, corporate balance sheets had also become strong. I think this time around we had banks stressed books, we had corporates in stressed books and also at this stage he wants to do it in a different way and they haven’t been in government very long enough. So, first year is a bit of finding out, trying out a lot of new things and getting some things right and some things maybe getting it right the next couple of years.Q: The finance minister there articulating how bringing stability in as far as the macros are concerned has been a big achievement for this government, tell us that by bringing down the fiscal deficit to 4 percent in comparison to targeted 4.1 percent and of course because of the excise duty hikes on petrol and diesel, we do have a significant buffer that the government hopes to leverage on in FY16 and that could lead to higher spends on the agriculture sector which we just heard from the finance minister. How would you assess the impact of what are the measures that this government has undertaken to stabilise the macros?Aziz: They inherited almost a year to a year and a half of pretty strong fiscal consolidation and current account deficit being brought down by in the last date of the UPA-II government and to their credit they continued with the macroeconomic stability in the one year they have. Clearly the global environment has helped them a lot, oil prices dropping has been a significant boom to the Indian economy. However at the end of the day, the macroeconomic stability that India has achieved, has been achieved by keeping spending under constraint, by showing fiscal adventurism and I think that any kind of lessons that we have learnt from 1981-1982 crisis, 1991-1992 crisis, the 2013 near crisis almost all of them had the genesis in trying to pump prime the economy through fiscal spending.So I am hoping that the government won’t be using fiscal policy as a counter cyclical tool. In India it has never worked and whenever it has been used, it usually have ended up in tears. I do understand that analysts and markets are basically asking for fiscal support by the capital expenditure but in India last 35-40 years, history will tell you that counter cyclical fiscal policy doesn’t work.

Q: Let us talk about monetary policy because highly faced government officials continue to tell CNBC-TV18 that the Reserve Bank needs to be much more accommodative or aggressive as far as its monetary policy is concerned. In fact going to the extent of saying that anything short of a 200 basis point cut is not going to change things on the ground as far as the economy is concerned. I know, no one is even expecting that kind of a number but in the context where growth is, where inflation is and the upside risk perhaps to inflation what do you see happening from June 2nd to the end of the calendar year?Aziz: My own sense is that perhaps we will have one more rate cut which is in June and if the Fed pushes the rate hike from September to December may be inflation continues on its downward trend which we along with the RBI expect to place at least through August unless a bad monsoon hits us. I would say may be beyond 25 may be there is a little bit scope again that depends on what is happening to global financial conditions.However, beyond that it is very hard to imagine that India can or there is space to bring down interest rate given the fact that the government just signed on February 20th a MOU with the RBI telling them that after January of 2016 till the end of the 2017-2018 fiscal year the new inflation target in 4 percent. So if you want to achieve 4 percent inflation target over a two year period 200 basis rate cut seem a bit excessive so I would say that may be may be another 25.Every market expectation has gone from one direction to the other direction. Almost across the board that was just not true in India but even in China everywhere else people expecting more of these monetary easing. If you follow these central banks they have and they remain across the board very concerned about cutting too much before the Fed rate hikes starts. Q: On the basis of what you have heard from this government, the focus on structural reform, again something that the finance minister was talking about and MR Chaudhuri was also discussing the implications of that in the ling term and perhaps one aspect that has not been talked about significantly is this entire piece as far as subsidy rationalisation is concerned. Lequified petroleum gas (LPG), perhaps the move towards kerosene being brought into the direct benefit transfer loop as well, that is something that the government is working on at this point in time. Structural reform, long-term implications of that and what would that eventually mean as far as ratings are concerned?Sheth: Let me start from the back as to the implications for the ratings. Now, if you look, we are talking about one year since the government took office. This is not the only government that took office about a year ago. Last year Brazil had elections, South Africa had elections Indonesia had elections. So, many comparable emerging markets also brought in new governments about a year ago or so. India, when you compare what has happened in India over that one year, India actually compares quite favourably to what is going on in Brazil, South Africa, even Indonesia to some extent. So, I would say that when we look at India, we look at it in comparative perspective and that is one of the reasons we have a positive outlook on its rating.To your point about specific policies, yes, one of the reasons why India is now rated at the lowest investment grade level that is BAA3, is because its fiscal deficit is much higher than most comparable countries. Yes, it grows faster than most comparable countries, but it also has a very large government debt burden. So, anything that occurs that could assuage this fiscal deficit would definitely be positive. And again, here India is showing creativity. We know that the tax revenue base is low, we know that some expenditures are rigid, so the extent to which the government could make those expenditures more efficient, that would certainly help. And that would be very credit positive.But again, I am in the camp that believes the near-term problem for India was macro-economic; it was the current account deficit, it was the fiscal deficit, it was inflation, that has been handled in the near-term. Structural reform is a long-term process. You are not going to see the results in one year, much less, it is probably going to be three to five years before you actually see the results.

Q: You have been listening in to what the other panelists have to say and of course the Finance Minister has said. What to your mind would go down as the single biggest achievement of this government’s performance in the last 12 months?Sanyal: A big success of this particular government had been in its approach. It didn’t really attempt any quick fix, it didn’t really attempt to walk down the beaten down road of populism. First of all when there was an expectation of a big uptick in growth in the near-term as well as over a period of time, they didn’t really try to boost growth immediately by indulging into fiscal indiscipline. That was a big achievement possibly to start with. Later on in the more recent times there is some kind of question about almost challenges to the political capital of the government after the big defeat in Delhi election, question marks around the upcoming elections in Bihar, they are not really talking in terms of indulging into any form of populism. Rather than that, they are sticking to the long-term plan of growth and development and boosting the long-term growth potential of this particular country.If you notice what they have done over the period of last 12 months, there are good number of measures which actually boost the long-term potential very significantly and that is possibly in terms of a framework the best to adopt if you really care for a three year and a five year growth and not so much about the next three months.Q: There has been no quick fix in that sense, as a very senior minister in the government told me, “we haven’t tried a revolution in most aspects, we have tried evolution,” but on the issue of social security schemes and the difference in approach from the previous government in comparison to what this government is attempting to do whether it is pension or insurance or a new health security scheme, for instance where I understand from our sources that the unclaimed deposits' money that the government hopes to get is actually going to be moved towards setting up some sort of a social security scheme when it comes to health care for the elderly. The approach on healthcare etc, how different is it and how significant will this be from a long-term story?Chaudhuri: Social security is a work-in-progress. This is one area where except for a few very successful schemes like midday meal scheme etc., the social security and social support base, many of the instruments did not really work very well on the ground and many of the people who needed help did not get help. Subsidies, being particularly part case of this, there is a need to rework it and it has to be innovative, there are no set ways. The government has to find out and be open to new ideas. Now, if I come back to this issue of evolution, you need revolution also because if you want to improve matters in the next three to five years, the next three to six months must also be good otherwise we will be waiting forever. So, get a bit of both. You need medium-term change and also you need short term improvement.Q: I agree with you but where is it that you would like this government to speed up action? The hallmark as Finance Minister Jaitley said is the speed of decision making, decisiveness in the face of obstructionism but where would you really like to see a revolution on part of this government, which specific areas where you believe that they should have done more or should have been faster? Chaudhuri: I am not going to be judgmental on this issue, all I can suggest is that in the next one or two years the things that need to get done like get infrastructure going and road awards going etc., step up road building awards; that is an easy one. They have got the funding now, they have the road cess to fund those road building awards, it is already a financially closed business, and so they should really step up on that. The second area is that many of the infrastructure projects have financing problems, so they have to pay attention to the banking sector, have to kick-start the debt market so that the banks can access money.There is a lot of foreign money which is becoming available; Japan has issued a lot of money. There is the Asian Infrastructure Bank, there are the Koreans. The third thing is agriculture. Agriculture needs to get deserved attention, otherwise the discontent that can spread amongst the rural India can derail a lot of other well intended things.Q: What does that mean then in terms of the GDP growth forecast because over the last couple of days we have actually seen a lot of people downgrade their estimates as far as growth is concerned for FY16, the Finance Minister spoke about focusing on agriculture. We are understanding that they perhaps up their spending on agri, provide some kind of support to farmers as well as specifically on the area of irrigation and that is what this fiscal buffer that they have been able to get in this year could be used for but specifically, in terms of growth estimates and the downside risk for the kind of number that the government has held out, what do you believe we are likely to see?Sheth: The monsoon every year tends to be a risk to growth estimates for that particular year and this year is no different. This is something that again will be a long-term struggle to resolve because irrigation is not something you are going to improve in one or two years, it is going to be a five or ten year process. In the interim like you said, there will have to be some sort of fiscal stimulus or fiscal solution provided to keep growth up but even with this, the kind of impact it has of course depends on what the monsoon eventually ends up being but the impact it has on inflation and that impact is not just on rural consumers, it is on urban consumers as well. The impact it has agriculture wages which is important in terms of overall consumption will be fairly high.

We are keeping our estimate 7.5 percent for this year intact for now because I don’t think we know enough about the monsoon to change it yet but I should say that yes, part of the reason why growth has been tepid even before the monsoon risk has hit us has been because the monetary policy was tight until very recently, and fiscal policy was also tightened over the last couple of years. So, those two things have actually been macroeconomic reforms and the outcome has been tepid growth but sometimes people conflate the tepid growth as lack of reform rather than a consequence of some kinds of reform.Q: What is your number one priority for the government? Sanyal: You have to now kick-start the investment cycle. Given the stress on the corporate balance sheet and bank balance sheet, it will not come, the catalyst needs to come from the government initially to some extent. So, if you offered more feeble models in some cases, some of the key areas, that possibly the best way to go forward to ensure that in the near term also, you see some quick uptick and mostly in the infrastructure areas.Q: Your priority for government?Sheth: Banking system is the one most we are concerned on which we have a negative outlook and second thing is resisting the urge to resort to fiscal stimulus to revive growth, and sticking to the path of macro economic stability.