India seen returning to close to 8% growth by fiscal 2020: Sameer Goel of Deutsche Bank
Deutsche Bank AG is looking for Indian economic growth in fiscal year 2020 to return to close to 8%, provided the global economy does not throw up any nasty surprises, Sameer Goel, head of Asia macro strategy at the German lender, said in an interview.
He also said data showed growth momentum generally improved in the year prior to elections. “Indeed, except for 2008, where the global financial crisis likely overwhelmed all other dynamics, the momentum has improved a year before elections, accelerating further in the election year itself, and in the year after,” he added. Edited excerpts:
Do you feel the outlook on the Indian economy and confidence in the economy is much better when viewed from abroad?
I think that’s a reasonable statement, and maybe most tied in to that fact that it is easier from the outside to take a more constructive view on the medium-term implications from the structural policy measures undertaken in recent years, versus the near-term headwinds posed by the same. Besides, looking in as an investor from offshore, and in deciding where to allocate capital, one tends to also put India in a more comparative light versus its peers in the high yield emerging market universe. And there is little doubt that India has done the most to distinguish itself from the grouping which was considered most vulnerable at the time of the “taper tantrum” four years ago. Inflation has come down with some help from global commodities and food prices, the external deficit has been reduced, the country’s foreign exchange reserves have been bolstered, and policy credibility has benefited from the inflation targeting framework. And all this has been duly rewarded with an improvement both in the size and the nature of investment inflows into India.
Deutsche Bank research in the past had indicated that the perception of policies slackening in the lead up to elections is incorrect, and also that there was no evidence of the budget deficit widening or inflation being stoked ahead of elections. In this context, how do you see 2019, especially when data suggests there is no strong relationship between gross domestic product (GDP) growth and electoral outcomes?
We do expect growth to improve sequentially in the next couple of years, both by way of response to cyclical, pent-up demand, and as the structural measures start to bear fruit. Besides, the growth momentum generally improves in the year prior to elections. Indeed, except for 2008, where the global financial crisis likely overwhelmed all other dynamics, the momentum has improved a year before elections, accelerating further in election year itself, and in the year after. Deutsche Bank is looking for growth in FY20 to return to close to 8%, provided the global economy does not throw up any nasty surprises.
Favourable macroeconomic data, second quarter results, and the bank recapitalisation plan are all positive developments that have taken place after India’s GDP growth slumped to 5.7% in the June quarter. So, is the economy turning a corner?
I am of the view that the policy moves over the past few quarters, including demonetisation, the goods and services tax (GST) and now bank recapitalisation are all structurally...positive in the medium term. But they present macro headwinds in the near term. Indeed, the sub-6% growth we have seen...is arguably mainly due to temporary disruption caused by these policy moves. The economic conditions though have started to stabilize post-GST, with high frequency indicators showing a rebound. We at Deutsche Bank expect the economy to recover to 6.4% in July-September, with the momentum hopefully improving further in the second half of the fiscal, as the base effect turns positive, and private consumption sees better tailwinds from pent-up demand. A lot does depend on how quickly we start to see the positive fallouts from GST and demonetisation in terms of widening the revenue base in the economy—and which remains a significant constraint—and from the bank recapitalisation on speeding up NPA (non-performing asset) resolutions and improved credit disbursal by public sector banks, in particular to small and medium enterprises.
There is also the global beta to consider. The world economy is seeing its first synchronized upturn since the financial crisis a decade ago, providing much needed tailwinds to global trade. India is a big player in global services trade and should benefit from the same. With growth, however, also comes the need to normalise policy settings to lean against medium-term price risks. The developed economies in particular are increasingly looking to recalibrate their interest rate policies to that effect, but this could potentially be disruptive for global capital flows, especially into emerging markets. This is particularly relevant for India’s ability to dip into the global capital pool to finance its own investment-related demands.
What are the major reforms that are needed to ensure bank recapitalisation is successful? Do India’s banks need more than just a bailout? Will recapitalisation leave Indian banks stronger and more sustainable?
Bank recapitalisation is not new—either in India or indeed in other parts of both developed and emerging economies. Historical experience suggests that for such an exercise to be successful, it needs to be timely, of sufficient scale, transparent, and with clearly laid out objectives.
In the Indian context, and given the backdrop of strengthening the framework for NPA resolution, this move is both timely—and by most current estimates, sufficient in terms of scale—for making space on the balance sheets of public sector banks to boost lending. It’s important that this exercise, and the funding for the same, is transparent in terms of how it is paid and accounted for, and the criteria for choosing which banks get the additional capital on offer, such as to avoid moral hazard.
So, bank recapitalisation bonds, for example, should ideally be designed such as to minimise the burden of interest rate risks they would entail on bank balance sheets. Finally, and maybe most critically, this exercise needs to carry clear guidelines on the “ask” from recipients of fresh capital—both in terms of dealing with problem loans, and on what is expected in terms of new credit generation. Let me put it this way: recapitalisation is arguably necessary at this stage to bolster the public sector banking sector, and to revive the credit, investment and growth cycle; but whether it proves sufficient or not will depend on the design of this exercise. This should be viewed as part of a wider objective to reform the financial sector.
India continues to look at getting big manufacturing going so that it can have an exports-led growth revival. Do you think policymakers are yet to realise that this won’t work for India?
Being part of the global manufacturing chain could help an economy lever up more quickly to better world economic conditions. The beta is arguably relatively lower on the services. So it is indeed tempting for a country like India to get “big manufacturing going”, as you put it. To my mind, there are two aspects to this issue. One, the comparative advantage which India would have in being a manufacturing hub. And two, the path taken towards realising that advantage.
Labour is a big advantage for India; capital isn’t, and neither is infrastructure, nor the bureaucracy of regulations. While many countries have taken the route to being export driven by way of policy support—keeping currency undervalued, export rebates, etc.,—it is less obvious whether that is quite optimal or even sustainable in the current global environment. Public policy in a country like India should arguably focus on structural improvements, and leave the optimal resource allocation in terms of sectors to economic forces. In that context, it should be noted that India has climbed a remarkable 30 positions in the ease of doing business rankings from the World Bank just in the past year, which reflects the various structural reforms undertaken by the authorities.
Asian markets are at their highest in 10 years. Why is it that the markets are not factoring in the risks, or do they see the geopolitical risks and other developments as the new normal?
It’s not like the markets are not aware or do not care about geopolitical risks. To some extent, it is not easy to price in such risks, given their typically complicated nature and uncertain timeline. But maybe more importantly, financial markets have become more confident about both the intent and the ability of policymakers round the world to identify and deal with tail events.
Policymaking over the past decade has ventured into much unexplored territory, and in particular on the use of central bank balance sheets to smoothen out the volatility. You could argue, of course, that there is a fine line between confidence and complacency. But policy communication has improved, and which is a key reason why the interest rate normalisation seen thus far in the developed world has mostly been very non-disruptive for risky assets, including in Asia.
What do you think are the big unknowns for the Asian economy in 2018? What is your outlook for Asia in 2018?
To consider the outlook for next year, one must look back first to what made 2017 a much better year for Asia macro than what most of us had feared at the start of the year. I would put it down to three key factors.
One, the tailwinds from a synchronised global growth and trade cycle, and which Asia was able to participate in, even as the worst of fears around protectionism and trade wars, thankfully, did not materialise.
Two, the outlook on China as a key economic engine for the region improved significantly, including on its asset markets and particularly the currency.
And three, central banks in Asia became progressively more focused on containing market volatility, which helped attract more foreign investor inflows into the region.
Whether these factors extend into 2018 will be critical then to the region’s outlook, and to whether Asia can continue to hold ground... We are positive on the prospects for global macro, but also worried that the financial markets might be under-pricing the pace of policy normalization that would necessitate. Policy communication will be key in that respect, especially with respect to balance sheet adjustments in US, Europe and Japan. Again, while we think the growth momentum in China will likely moderate in 2018, what would be more critical is how policymakers there deal with the need to de-lever the economy and reduce structural excesses.
We expect growth in Asia overall to hold up close to 2017 levels, but with somewhat greater differentiation, and likely with more pronounced price pressures than this year, necessitating a gradual move towards removing monetary accommodation.
Currencies in the region will likely cheapen somewhat, and interest rates will likely go up, though in most cases we think markets will outperform other parts of emerging markets.
The big unknowns for next year—geopolitics, trade protectionism, and oil. It’s important that the global trade pie grows, but equally that Asia is able to carve out a proportionately equivalent, and hopefully larger, share from the same. Market volatility will likely rise next year; and it would probably drive more differentiation in terms of asset performance between good and bad policymaking.