New Delhi: Rajeev Malik , senior economist at CLSA Singapore Pte Ltd, a securities house, in an interview minces no words on the state of affairs in Indian polity and economy and takes the garb off the reform measures the government recently announced. Malik, a long-time India watcher, previously worked with Macquarie and JP Morgan Singapore, tracking macroeconomics or covering fixed income, currency, equity and sovereign asset classes. Edited excerpts:
The government announced a spate of reform measures. Will they work for India?
I think reforms is a grossly overused word. What India announced was a set of long overdue, set of constructive positive measures with a couple of them being reformist or broadly labelled as reforms. What the spin doctors have managed to do is label everything as a reform and that tells you, the irony of the whole thing is that the government had been in sleep mode for so long, that now whatever it does is given a reform spin.
Increasing diesel prices under administratively set prices is not a reform. A bailout package for state electricity boards is not a reform. The thing about aviation is, was it done because there is trouble with a particular airline?
I think there is a distinction between economic compulsion—that is pushing the government to announce some of these things—and economic zeal. Will they work? Well, some of them will. Others we just have to wait and see if they make it through Parliament. The challenge now is that expectations have risen and if there’s one thing history teaches you, Indian governments do not over deliver in a high-expectation environment.
Do you see more foreign direct investment (FDI) inflows in reaction to the measures announced?
A lot of it will depend on state-level reality. Just announcing it is no reason why everyone will line up. Surely, people will come in as there is a compelling domestic story. But don’t forget the good times were when the domestic retailers did not want FDI (foreign direct investment) to come in and now because there is a certain compulsion, it’s been opened up. And, I think, even if you buy the argument some of the spin doctors are talking about, on how favourably it will act on inflation, it is exaggerated. How successful it is really going to be depends on state-level (politics). If you look around the different airlines in India, how many of them have a profile very attractive to any of the foreign airlines?
The recent credit policy saw a public face-off between the government and the Reserve Bank of India (RBI) over interest rates. Is it appropriate to cut interest rates at this time or to have a more prudent macroeconomic policy?
The ministry of finance needs to realize that gone are the days when dictates could work. One of the reasons why RBI may not have cut rates, is because had it cut rates, it would have been ridiculed by people saying it did it under public pressure. I think (finance minister) Chidambaram’s public pressure was too public. There are enough things that can be done behind the scenes, not in the public domain, and a relevant outcome can be achieved.
We do think, come January, the rates will begin to ease. It is a mistake to label RBI’s policy as tight as it claims to be. RBI has been easing by stealth for quite some time. If you look at some of the market rates, commercial paper rates, deposit rates, all of them have come off because of the liquidity injections that it has been giving.
So policy is not as tight as RBI would like to give indications about. Equally, it has not been following its own guidance; so its walk is different from its hawkish talk. Our own expectation is, over the next 12 months or so, we will see roughly about 100 basis points of rate cuts coming through. (One basis point is one-hundredth of a percentage point.)
What’s your outlook for inflation and gross domestic product (GDP)?
GDP is seen at about 5.5% for the current fiscal, improving slightly to 6%. A lot will also depend on some kind of implementation, especially with the national investment board. Some of the details, how well and effective it is, will matter. But, I think, we will look back at this period in a few months’ time and talk about it as an important turning point. The government and finance minister have successfully managed to reflate the markets, but now comes the difficult part. That you have to continue feeding the monster that requires more and more constructive policy and reforms. All of them are not going to be smooth and easy to come through.
Do you think the movement against corruption has put India at an inflection point and that there could be social, political and economic changes on the anvil?
The debate is not whether or not there will be change. It really is about the magnitude of change. It’s not as if corruption did not exist in India before the (corporate lobbyist Nira) Radia tapes became live. The dirty laundry was in public display, and that had a whole different ricochet impact, as a result of which the bureaucracy was hauled over decision-making in a way that slowed it down. Nobody wanted to make a decision, no matter how good it was to the best of their ability, because somebody would come around and challenge it. Which is why all these decisions were then left for an e-GoM (empowered group of ministers) to put together so that it was a collective responsibility rather than individual responsibility.
That actually told you a lot about a dysfunctional system. Because, in a system where everyone is working as effectively as they should be, a lot of the decisions should not be floating up to the prime minister’s office to take a call on.
So, I think, some change will clearly happen. If you see what (activist-turned-politician Arvind) Kejriwal has managed to do as an outsider, really galvanized the current debate over corruption and break that code of silent understanding between different parties—“you scratch my back and I scratch yours”.
How much of that gets translated into a political election outcome is a different story. But, clearly, he is capturing a space where a lot of the angst of the common people—“mango people”, if you may—is actually getting captured.
What is the one odd thing and one nice thing about the Indian economy not seen anywhere else?
Indian companies are a lot more entrepreneurial, street smart, and part of the reason is they don’t rely on the government. Because, if you rely on the government, you will probably die very soon. So that creativity burst that we often talk about in a positive way is partly an outcome of a dysfunctional government, on which nobody wants to rely. So you are constantly thinking laterally, out of the box, to beat the system, because if you don’t, the system will eat you alive.
The fact that it’s a large economy—it is reasonably well diversified, so its ability to absorb shocks is actually fairly large. Currently, on our numbers, India will grow about 5.5%, slightly over 6% in non-agri GDP. This is in a year when the rest of the world is down on its knees (and) when for the last 10-15 months hardly any decision making has taken place in India. A 6% non-agri GDP growth is what a lot of countries deliver under the best of circumstances.
It’s not to say this is enough for us. But when you look at relative terms, there is a lot of built-in resilience that should not be ignored. The saddest part of India’s story is India’s politicians. We would love to outsource them, but nobody wants them.