Central banks clearly willing to support drivers of growth: IMF

Central Banks’ monetary policies are indicative of support for other drivers of growth, which may not be doing so well, says Subir Gokarn, Executive Director of International Monetary Fund (IMF). The European Central Bank (ECB) of Thursday lowered its deposit rate further to -0.4 percent, taking it to negative. While the experts are surprised by the move, Gokarn says that ECB and Bank of Japan are trying to provide stimulus for other growth factors. Monetary policy in the US, on the other hand, is returning towards normalcy and there are expectations of further hikes. While this may give boost to other structural reforms needed, it is “naive to expect monetary policy can substitute other growth drivers,” he adds. Speaking about China, Gokarn says that IMF as well as the government indicated fairly narrow growth range of 6-7 percent. The policy framework is exercising some degree of control as indicated by the numbers, he adds. “Expectations of disruptions are not very high,” Gokarn says.In India, Gokarn says, emphasis on infrastructure is imperative. Countries having space for borrowings must focus on infrastructure spending, which can further push private investment. The IMF conference titled 'Advancing Asia', which kickstarted on Thursday in the capital, aims at trying to move from relative comfortable situation into much more robust and sustainable growth model for the Asian economies. The theme for the conference is ‘Investing for Future.’ Below is the transcript of Subir Gokarn’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.Latha: I really want your perspective from your perch on the global situation and the global economy. The message of the European Central Bank (ECB) chief has been that he has gone all out to help the markets with more liquidity and the rate cut, the markets have sulked after that. Should one take the message that there is a limit to central bank policies to be able to stoke up growth?A: I think so. Let me set the context a little bit by pointing out that monetary policy in the US is returning to a path of normalcy, one rate hike in the Fed funds rate has already happened and there are expectations that more will happen, but of course there is some debate on the pace and the timing. But, on the other side, both bank of Japan and the ECB have actually moved back into somewhat unconventional territory, effectively moving into negative interest rate zones and therefore breaching what was considered in violate some time ago which was the zero lower bound that is you cannot take your policy rate below. They have done it effectively. And what this suggests is that the other drivers of growth that one might have expected to see starting to show some signs of life now are simply not doing that. There are a whole variety of reasons why this is the case. But what the central banks are signalling is that they are willing in this period of relatively low inflationary pressure given the commodity price scenario and so on, to support as far as possible, the other drivers – what governments are going to do in order to try and stimulate a growth in terms of infrastructure, in terms of reform. The whole structural reform agenda that every country is trying to deal with, trying to come to grips with. So, monetary policy will go as far as it can to support this. But the expectation that monetary policy will be a substitute for stimulating the other growth drivers is a naive expectation. So one reason why I think you are seeing a somewhat lukewarm response to this relatively frequent efforts to push the monetary envelope somewhat further is that unless we see signs from governments that this structural reform agendas are getting on track, it is not enough to just bring interest rates further and further down. There simply is not going to be enough stimulus coming from this. Investment is very sluggish, consumption is obviously constrained by wage levels, unemployment and so on. So, you need to see something happening that will complement monetary policy. In turn, the monetary policy reinforces and pushes the effects of stimulus that you will see from other sides. But that requires long-term strategy, long-term commitments. So, this is not a very easy situation to get out of. Latha: I will come back to the zero bound and the European situation. But what is the international monetary fund (IMF) or your reading of the Chinese situation? We saw the inflation numbers come in a little higher than expected, but do you think China will be delivering on that 6.5 percent growth? As well, what are the expectations from the yuan? A one time depreciation cannot be ruled out?A: I will not comment on the currency action, but from what we are seeing, both in terms of the IMF forecast and what the Chinese government has said recently, that the forecast basically indicates a stabilisation in the mid-6 range. The forecast for 2016 and 2017, at this point of course, there may be some revisions when the world economic outlook is released in time for the April meetings. But right now, it suggests around 6.3-6.8 percent. In that fairly narrow range between 6 and 7 and that would indicate then that there is a perception that the policy framework will come to grips with the pressures on the economy and there will be some stabilisation. Now, this of course involves dealing with a number of stress points whether it is on excess capacity that is a big part of the story, how are they going to deal with excess capacity, which is actually having global implications from my view point. Dealing with the weaknesses, the stress in the financial sector, dealing with issues relating to slowing exports and this is all happening in the backdrop of the whole transition which the twelfth plan talked about which is moving from export to domestic, from eastern part of the country to the western part and moving away from overall investment led growth to consumption led.But this is a massive and complex transformation, but at least the forecasts are suggesting at this point that the system, the policy establishment is exercising some degree of control and so the expectation that there will be these disruptions is not very high at this point. But these are projections and these are forecasts and I think everybody is watching very closely to see how this system is managing, this transition process in a situation where the global economy itself is not in a particularly robust state. So, it remains a big risk factor overall, but the baseline scenario is controlled relatively well managed transition into a slower rate growth. As we saw the government’s own view is that 6.5 or so is where that stability can be achieved. And that is what the forecasts are pointing out. So, at this point it seems that there is a reasonable scenario that it will not be a terribly disruptive kind of a transition.Reema: You indicated that it is naive to expect that the monetary policy can substitute other growth drivers. Can we expect any fiscal stimulus from countries like China and if yes, will that stoke growth and resurrect the markets?A: I think fiscal capacity also, globally speaking and I am making a very general statement has been significantly bounded by the response to the 2008-2009 crisis. So, in looking at most countries’ debt to gross domestic product (GDP) ratios, they are in ranges which would make it very difficult to be able to justify a further expansion in indebtedness, in borrowing, and in turn the question is, even if you were to borrow, even if you take this to – some countries are already at fairly dangerous levels – take this debt situation into more fragile territory, what exactly are you going to do with it?But where capacity exists, where countries which do have some space, the focus on building infrastructure, on creating assets, which will then to some extent help to stimulate private investment is a very reasonable expectation and option that they have and they must exercise. So, that is part of the overall structural reform agenda that we can talk broadly about, but different countries have to deal with their own situations based on their capacity. Speaking from the Indian perspective here just as an example, the emphasis on infrastructure is very critical, we have seen in the Budget, a reorientation of some sort of expenditure towards infrastructure and the setting up of the national infrastructure and investment fund, it is moving towards now taking in concrete shape, that would be a very important example of bringing structural changes to bear on providing additional growth stimulus.Latha: A word on the conference in Delhi this weekend. Is that what you are going to discuss, the way in which Asian economies can use their fiscal buffers and beef up infrastructure?A: I do not think it is a question of fiscal buffers, I think this is a conference, the Advancing Asia Conference, the theme, the title of the conference is investing for the future. And it is really an attempt to bring the whole range of experience and the strategies that countries in the region have used to address a very important question which is, Asia is an island of high growth in the global economy. Even though there are differences across countries, the region as a whole is still the global growth driver at this point.And we have to think in terms of exploiting, leveraging this currently relatively comfortable situation into a robust long-term sustainable growth strategy. What do you need to do that whether it is investment in infrastructure, whether it is dealing with environmental consequences, whether it is the global volatility in terms of capital flows and so on. All of these are both opportunities and threats for growth. And the object of the conference is to try and move from the current relatively comfortable situation which the macro environment, the region presents into a much more robust sustainable long-term growth model. And that is really the substance of the conference which is really the beginning of a series of similar exchanges between the global perspective represented by the fund and its experts and a range of expertise, both practical and conceptual from the countries in the region.