Mumbai: Indian banks are now single-handedly taking on the risk of financing what was earlier shared by equity markets and venture capitalists, says Jahangir Aziz, executive director and chief economist in India for JPMorgan Chase and Co., and a former principal economic adviser to the Indian ministry of finance. In an interview, Aziz who spent 14 years analysing the country for the International Monetary Fund (IMF) said that India should draw lessons from the Asian financial crisis of the late 1990s. Edited excerpts:
There is wide disparity in the views of the government, Reserve Bank of India (RBI), IMF and market participants on India’s economic growth prospects for 2008-09
Lesson to learn: Aziz says that despite India’s high savings rate, an intermediary is required to bring the savings from households to investors. Abhijit Bhatlekar / Mint
The central bank is saying 7% with amplified downside risk. They are coming out and saying everything is fine. Monetary authorities are usually very conservative. So when they say “amplified downside risk”, that needs to be interpreted as amplified downside risk. IMF is far more bullish, but their numbers have created a problem. What has not been specified is that they are looking at the calendar year numbers and not fiscal year numbers. The Prime Minister’s (economic advisory) council says 7.1% and does not talk about the stress or downside risk. The PM’s council is probably more optimistic than RBI and definitely more optimistic than most of the market players. But even in the market, there is wide dispersion. Some analysts are pretty optimistic. We, at JPMorgan, are at 6.25% for 2008-09—well, somewhere between 6% and 6.5%. It is very difficult to pin down.
You were in Hong Kong a decade ago. What similarities do you see in the downturns then and now?
Couple of things. There are two lessons relevant for India from the 1997-98 downturn. It started as (a) massive shock, though not global, for the Asean (Association of Southeast Asian Nations) economies. The initial adjustment is a very precipitous fall in the price of assets across (the) board. And then it slows down. In places where the adjustment in prices was slowed down either by government or because of market imperfections, those were the places where the subsequent recovery took the longest with an extended protracted period of slowdown. The V-shape recovery took place where prices were allowed to freely adjust.
What is the most crucial factor for growth recovery?
The growth rate in India has almost entirely been led by massive increase in investments. We talk about the large consumerism. In reality, consumption as a share of GDP (gross domestic product) has fallen by almost 5-6 percentage points. Investments have increased by 10-11 percentage points of GDP. So it has been an entirely investment-driven story. Now, investment by itself means nothing. It just creates capacity and it has to be eaten, literally, either domestically or somebody else eats it for us. The fact that consumption as a share of GDP has fallen indicates that we have relied more on foreigners to consume the products, both services and goods.
How will the excess inventory piling up in China affect India and the world?
The biggest difference between India and China is that in China’s case the share of consumption in GDP had fallen more and as a result foreigners had to consume a lot more of the capacity that investments have been creating there. Now, China is “rebalancing” growth away from foreign dependence to internal. This will have impact on the world and particularly in this region. China has become an important source of final consumption in the region, as in the case of cement and steel.
China puts in so much through its fiscal stimulus packages, capital expenditure, new infrastructure, etc. So you are replacing private investment with public investment, which again is creating excess capacity. Somebody down the road has to consume this capacity. If consumption in China does not pick up, then it is back to the problem when it needs somebody else to consume the products. They have to let loose consumption and that is the only way the capacity created can be absorbed. This is a bigger challenge than building bridges or stations.
When do you see revival in the investment cycle? Will internal savings help India’s recovery?
Investments in India will be dependent on the recovery in the US, which will give fund managers the confidence to allocate money here. The positive corporate cycle had resulted in large corporate savings, which provided cheap financing for investment. This time, the corporate cycle is heading in the other direction.
The argument that is floating around is that overall, India’s savings rate is high at 31-32%. Even if households have that kind of savings of funds, there should be some intermediary who brings that from households to investors. Somebody has to take that risk of promising the households that your money is safe with me. The equity markets, which took this risk for the past five years, are virtually shut. The corporate bond market has signs of life but the large buyers of these bonds—non-banking financial companies and mutual funds—are themselves facing liquidity issues. So, collectively the entire nation has turned towards banks to provide funding as well as take the risk, which was earlier collectively taken by equity markets to venture capitalists.
RBI steps to support banks to shoulder risk...
RBI has taken a significant number of steps. They opened up foreign institutional investor limit on corporate bond markets, made it easier for banks to take the risk by reducing capital charge, provisioning, etc. When RBI complains about banks not following their policy rate cuts, a bigger complaint they should have is that banks have not acted upon the regulatory space that has been created for refinancing or debt restructuring.
I have not heard of any big debt restructuring other than that of (realty firm) Unitech Ltd. Maybe the regulator needs to do (a) little more or needs to nudge these banks a little more. I see more concern on banks not strengthening their balance sheets. We have a successful case of the corporate restructuring mechanism. The steel companies were restructured successfully in 2001-2002... So the blueprint is there... I (also) belong to the group of people who believe RBI should be cutting rates more aggressively. By delaying this, we are delaying recovery.