Kristin Lindow is vice-president and India analyst for global rating agency Moody’s Investor Services. She is appreciative of India’s growth, but admits that “the potential of the (Indian) economy is not clear at this stage”. She spoke to Mint’s Paromita Shastri.
Do you find the 9% growth projection sound and sustainable?
Clearly, the economy has been growing at high rates for several years now. We had upgraded the growth prospects to 6-7%. Even though sustained achievements point to serious efforts, the potential of the economy is still not clear at this stage.
The lack of sophisticated data-gathering techniques also contributes to the questions about growth capacity and potential. To my mind, the potential as of now is definitely below 9%.
What are the constraints that may erode growth significantly?
A large part of the explanation is a global phenomenon, that is, the availability of excess liquidity, which has been channelled into fast-growing, high-yielding markets like India, alleviating the capital constraints that would otherwise have restricted the expansion of economic activity. Despite serious signs of overheating emerging because of capacity constraints, growth does look sustainable.
But problem areas remain in the way to achieve growth above potential. Inflation is above the Reserve Bank of India’s (RBI’s) comfort level.
The government has been too reliant on monetary policy, while fiscal policy has been too accommodative. The suppressed inflation in the economy is obviously higher. The mismatch between savings and investment continues.
Other inflationary impulses arise from infrastructure constraints and a shortage of skilled labour, which has led to steep wage rises.
Do you see inflationary pressures continuing?
Governments don’t want the negative signs of high growth to show up. The Budget might bring about some duty cuts. But food, real estate, home sale prices are still high. Some pressures will still continue to be there.
Micro-management is necessary to keep it down, but government subsidies for oil prices are still not clear. Very likely, the annual inflation will top RBI’s computed range (of 5.5%). But then again, inflation is an outcome that is logical when the economy is growing very fast.
Do you find signs of overheating in the stock markets and asset markets? Are the prices unrealistic?
This is not my area of specialization, but people who look at valuations of stocks feel that they don’t match profit levels. But it is also true that corporate profit levels are still very high.
Corporate profits and expectations have really pushed prices to the current high levels, and this is not surprising at all. Real estate, too, tends to follow business cycles and all this do point to the fact that India is at the peak of the cycle.
Why is monetary policy apparently ineffective in controlling credit growth and inflation?
When a lot of external capital is coming into the market, it is very difficult for RBI to be as effective as it wants to be. More and more companies, even housing companies, have access to external funds. So, the risks associated with external funds have to be assessed.
Is a more than 30% year-on-year credit growth too high and unmanageable?
Developing nations such as India are relatively unintermediated systems. Such credit growth is not unexpected.
But the question comes that, perhaps, some banks are not doing enough credit assessment or competing with each other a bit too much. But on the other hand, banks have improved a lot and made their systems better.
Your forecasts and wish-list for the Budget?
Rating agencies, contrary to the general belief here, are still trying to be objective. But governments are subject to many more economic impulses and political compulsions. One would expect that because it’s mid-term now, they would actually get serious about reforms. There are both kinds of expectations—populist and virtuous.
The real issue is that because the government has made commitments to address the issues of lingering poverty and disparities, it is somewhat torn over the market-oriented measures that have an initial deleterious effect on incomes. But the expected result will be a further impact on outcomes because of the budget management Act.
All the elements of a very positive action are now coming to the fore. We’re seeing the dynamic growth as a payoff to hard work and increasing globalization and integration. But the two faces of the economy will have to be reconciled.
It is heartening that the government is increasingly cognizant of that contrast, especially in the farm sector. Countries such as China have belatedly realized the need for this. From that view, I am hopeful that the right balance will be struck.
Is the economy taking off?
India has taken off.