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Singapore: With the passage of the goods and services tax (GST) bill, the bulk of reforms expected of the Narendra Modi government have been put in place and these policy changes, along with greater fiscal headroom from an improving economy, will ensure sustainable growth in the next few years, says Rahul Bajoria, regional economist, emerging markets research, Barclays Plc.

Besides GST, the reforms include rationalization of subsidies, introduction of cash transfers, easing of foreign direct investment (FDI) rules, greater fiscal devolution to states, formalization of an inflation target for monetary policy, auctioning of natural resources and introduction of a bankruptcy code.

While international investors would like to see some other pending reforms in other factor markets such as labour and land, these measures do not look imminent, Bajoria said in an interview.

Edited excerpts:

Now that GST is done, what do international investors expect from the Modi-led government in terms of reforms? Will it be possible to roll out GST on 1 April next year?

With the GST being approved, one gets a feeling that the bulk of reforms that were expected from this government are largely done. With the benefit of hindsight, one can acknowledge that the government has managed to push through several reforms, whether it is GST, fuel subsidy rationalization, introduction of cash transfers, FDI liberalization, greater fiscal devolution for states, formalization of an inflation target, auctioning of natural resources and introduction of a bankruptcy code.

All of these, along with a greater fiscal headroom from an improving economy, will play their part in reviving growth sustainably in the next few years. Some other pending reforms in other factor markets such as labour and land are desirable, but they do not look imminent in the next year or so.

On the timeline of GST, it is a tad difficult to speculate whether the 1 April 2017 deadline is feasible. One would expect the hurdle of state legislation to be overcome easily, but to ensure that the GST is introduced in a non-disruptive manner, even if it is delayed somewhat, it would probably not be a bad thing.

You share the view that in terms of reforms, the Modi government is pretty much done—so, going forward, it is largely going to be about execution. With regard to execution, how do you rate this government?

That has clearly been one of the strengths of this government from Day One. While its legislative agenda was always going to be an uphill task, the execution part, particularly in infrastructure has been pretty good. While we have still not hit the benchmarks set by the government itself, the improvement in areas around power, coal, roads and highways and to an extent railways have been noticeable.

Looking forward, one would expect execution and completion to pick up pace in these areas, but also extend to other sectors such as telecom and broadband penetration, water resources management and banking services.

In fact, resolving the NPA (non-performing asset) issue in India’s banking system and recapitalization needs urgent attention; and despite the progress made so far, a lot of work is still pending. One can see that in certain cases, it is the ministers and the team of bureaucrats who have made a huge difference in delivery and execution of projects.

Rural electrification and improving Coal India’s output is a great example of smooth execution and transparent performance monitoring. Even within railways, while hard infrastructure results are yet to pick up materially, a lot of bureaucratic cobwebs have been removed, and divisions are being empowered to execute projects of certain sizes on their own. The time it takes to tender out projects has been shortened, and this will start having a material impact on infrastructure augmentation in the next one-to-two years.

Monsoon rains have been very good. Does that mean 8% growth is on the radar?

Yes, it is possible that in certain quarters, India’s growth rate may move above 8% due to good monsoons and the Pay Commission hikes; but that is unlikely to be sustained for now. In our view, we see India’s growth improving gradually, and while there are bright spots present, there is still significant overcapacity in traditional growth sectors such as steel, cement and other commodity-linked areas, which will weigh down growth.

This has also kept investment growth tepid; and while we see new sectors of the economy where investment growth is improving, the overall pace of improvement will still likely remain relatively subdued...

Without a strong investment recovery, India cannot sustain its high gross domestic product (GDP) growth rates in the medium term. But there is hardly any growth in private investment. So, how real is the recovery? Looking back, can we say that the nascent recovery seen in FY15, as the new government was formed, has failed to gather any momentum so far?

Private investment is mostly a lagging indicator of growth. Given the problems of leverage and excess capacity that the corporate sector faces, we can expect private investment to stay low for some time. However, asset disposal and debt reduction have begun, and this will help relieve balance sheet stress for corporate India in the coming months. Even outside of private investment, growth has been hit by several headwinds, including two failed monsoons and ongoing fiscal consolidation. Even in such a scenario, growth recovery has broadened, and we are seeing urban consumption leading growth, while rural consumption is expected to play catch-up post-harvesting. This bodes well for growth in India, and it is being done without creating strong inflationary impulses and while fiscal consolidation is underway. This is a strong departure from the growth of 2010-2011, which was fiscally driven and unsustainable.

Looking at India’s growth numbers, many have raised the prospects of the country replacing China as the main engine of global growth. What is your take on this? Is India’s economy large enough to make up for a slowdown in China, or by when do you think it will be large enough to have the same global heft as China?

As of now, India does not match the size or scale that China currently exerts on the world economy. Whether one looks at size through the prism of nominal GDP or PPP (purchasing power parity)-adjusted real GDP, in both cases, China is far ahead.

Incrementally, as India’s growth continues to outperform China, the gap may narrow; but that will take a long time to materialize. India does not enjoy a favourable global backdrop, so it is more challenging for India to play catch-up with China or the rest of the large economies, and this is a reality that needs to be embedded in India’s growth policy.

We also need to be mindful that with China’s excess capacity rising in manufacturing, the competition for a shrinking global export market will be on the basis of technology and quality of goods, rather than price.

But in isolation, India can aim to grow sustainably at ~10% every year on US dollar terms to effectively double its economy in roughly eight years, which will give the country tremendous potential to become a price maker in several key markets, especially commodities.

The marginal demand from India in several markets has been strong, and this is what has gotten India favourable deals, particularly for oil and gas. This trend will likely only strengthen in coming years.

When you look at the numbers from India and China, can you believe either of them? Are the two biggest emerging markets, India and China, growing much slower than official data suggests? How do you get a handle on the real pace of growth in both countries then?

Quality of data is an ongoing issue in both India and China. Both economies have recently changed their GDP methodology, moving it closer to international benchmarks set by the IMF (International Monetary Fund). While doubts may linger, I personally believe that the GDP figures might be a more realistic assessment of the economy than what the high frequency indicators such as IIP (Index of Industrial Production) show, since they are dated, and may not take into account capacity expansion that has taken place in the past five years.

Another problem has been the lack of a long time series on the new GDP numbers, which have prevented people from estimating the trend rate of growth in the new series.

This to me is an absolutely critical area where the government should look into, as without quality data, policymaking will always be dependent on erroneous information. One approach can be that without looking at the level of growth rate, one should focus on the change in growth rate, which might be a more useful indicator at this point. By that metric, India’s growth has been improving gradually, and China’s growth has been slowing consistently.

How concerned are you about any further yuan depreciation—how will this impact the rupee?

Currencies across Asia have largely stayed stable or appreciated marginally against the USD (US dollar) post the UK’s referendum. In this context, CNY (Chinese yuan) actually had depreciated a fair bit in July, but has since then pulled back a little, without causing any disruption in other currency pairs.

This, to us, indicates that negative spillovers from a weaker CNY into other Asian currencies is fading, and this trend will likely only strengthen as the CNY moves two ways in the coming months, which is an important underlying objective of the policymakers in China.

The impact on INR (Indian rupee) is likely to be relatively muted as long as CNY movements are within a reasonable limit.

Coming to the Reserve Bank of India (RBI), not much is known as to who the next governor will be. Do you share the view that expectations of a dovish successor have spurred markets in recent weeks, especially the bonds space?

There were several tailwinds for bonds in the last few months. It is very difficult to dissect whether it was expectations of a dovish governor, or timely rainfall, or liquidity injections or capital inflows into emerging markets which spurred the bond markets.

Overall, the formalization of an inflation target at 4% is positive news for the bond market, and the mandate for the new governor and the MPC (monetary policy committee) has been now set in stone until 2021.

With inflation expected to come off on the back of strong rainfall and sowing, one can expect RBI to ease rates a little bit more, which will support the rally.

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