India should look at an interim stimulus package to kick-start growth—a route taken by many governments in Asia to impart momentum to their economies, said Rajiv Biswas, the Asia-Pacific chief economist at IHS Economics and Country Risk Group. “There may be a case for a supplementary package on top of the budget to try and front-load public sector infrastructure projects... The focus on such a package will need to be on spending measures that can be implemented very quickly—there is no point in having visionary changes that will take years—that is not what India needs right now," he said in an interview.
Sitting here in Singapore, what are you reading from the latest data coming out of India?
Latest data is not encouraging—in fact, Q2 (June quarter) numbers were quite concerning as growth momentum has slowed to 5.7%. When you particularly look at industrial production data, it is very weak. Since Prime Minister (Narendra) Modi came to office, which is now over three years ago, we have never really seen a strong recovery happening with industrial production. Modi has been focusing on infrastructure development, boosting manufacturing through ‘Make in India’, and we have had rate cuts, but in the end, the data is showing that all these have not helped boost industrial production. The July data for industrial production showed a 1.2% increase y-o-y (year-on-year)—that is too low and very weak for a country that is supposedly one of the fastest growing in the world.
The data does not match up. Even more concerning is that manufacturing output in July was up only 0.1%—hardly any movement y-o-y. Within manufacturing sector, we must break it down to capital goods and consumer goods—what I watch carefully is capital goods because that indicates investment. Capital goods is down 1% y-o-y in July, and that is a discouraging number because it indicates we are not seeing a pickup on the investment side. Data shows India is not in a good situation. But there are some positives like the auto sector that is showing reasonable momentum in sales. Commercial vehicle sales are also up. While it is not too dismal overall, the momentum clearly is not what the government would like to be comfortable with—they need some changes in policy to get growth back on track. We need accelerated investments by private sector and government for there to be a wider recovery across industry.
So what should the government do?
If you ask me where to from here, there is a strong case for special measures to ramp up pace of public sector infrastructure projects. That could mean bringing forward some of the spending. But in the case of India, the problem is more around regulatory approvals—we need to cut red tape, and government-controlled infrastructure projects such as railways and roads need to be speeded up. For the private sector, the problem is a lot more complicated because you have to look at this along with what is happening in the banking sector. Public sector banks have a lot of distressed assets on their books—over 16% of public sector bank assets are stressed assets according to official data—what this means is credit expansion of public sector banks has slowed considerably since 2012, to the point that there is hardly any major borrowings from them. That is the primary reason we are seeing such weak pace of momentum on the investments side; therefore, it is complicated—because to revive growth, we need to clean up the banking sector, and only then can we move towards a recovery of the manufacturing sector. The problem is the government has not recapitalized public sector banks—they have done a little, but not enough to clean up balance sheets of banks. India also has to balance its fiscal issues—so the government does not want to move off course by trying to recapitalize the banks—but it is clear that something has to give—this pace of adjustment is just too slow.
Does that mean that the Modi government has not utilized the political capital it had to undertake difficult reforms? Or, is that it did undertake reforms, but failed on the execution part?
The Modi government did undertake some important reforms, but remember, they did not have the majority in the upper House—so they could not have done whatever they wanted. They did whatever they can within the political limitations—the intent is on the right track, but the implementation has been messy.
I would particularly highlight the demonetisation episode and GST (goods and services tax) implementation—they were chaotic. I don’t sympathize at all on demonetisation, because the government was responsible for getting us into that mess.
But in the case of GST, my sympathies are with the government—they are trying hard to do the right thing, but implementation has been tough.
I don’t think they the enough lead time to explain all the new categories to the corporate sector, and now we are seeing the fallouts, especially in sectors such as exports, where exporters are complaining that the process of reclaiming GST is complicated, and that is hurting their competitiveness.
This is just one example. I think the issues related to implementation will work themselves out by next year, but will impact this year’s growth—it created delays and impacted output because people are not clear when to buy products, and this affected production and industries in the June-July period... The reforms are well intended, but processes were not in place.
There are also questions as to why Prime Minister Modi, given his track record in Gujarat as far as infrastructure is concerned, has not been able to do the same at the centre.
But assuming that the Modi government gets the infrastructure part right, will its strategy of speeding up spending on infrastructure to create jobs and demand in the economy, be sustainable, without the private sector also contributing?
Definitely, we need the private sector to kick in, because the government on its own, can’t continuously prime the economy year after year... In the three years, there has been no pick-up in corporate spending, and it has been weak all along. So, there is no indication from the industry that they are getting more orders for infrastructure products, be it steel, cement and other raw material inputs.
So the sense is that it will take another 1-2 years for it to pickup, but we have been hearing this argument ever since Modi has come in. It indicates a lack of capability to ramp up infrastructure development—once you get infrastructure development happening, that will help bring some improvement to the private sector as well.
So, it has to be a bit synchronized—you need the government to do some front-loading on spending, and to try and improve momentum, and that should push up the private sector, and provide them the required inputs. In parallel, they need to ensure that the ‘Make in India’ commitments translate to some real spending—we’ve had these commitments from companies for three years now—but where are these projects? Perhaps we can argue that some of these are held up due to approval processes, but then the delays are hurting. We need to develop infrastructure, get the smart cites projects going, and lot more is needed to done on the affordable housing programme—countries like China and Indonesia have put a lot of capital into this space. India can quickly do more on affordable housing, and it will translate to jobs, and orders for private sector—these steps can help jump-start the economy over the next six months. Simultaneously, the government should work with public sector banks and help them clean up their balance sheets.
There is a lot of talk on fiscal stimulus—will this help revive growth? Do you think overall, the costs of targeting higher growth with extra stimulus are likely to outweigh the benefits? Besides, higher spending to boost sub-6% growth may risk a budget gap. A stimulus package may also lead to a scenario where India is further downgraded by rating firms, and if that were to happen, investors will dump Indian assets.
Certainly. If the economy is slowing down, there is every reason to have interim stimulus packages. Many governments in Asia have taken this route in recent years. In fact, Japan has just announced additional measure to help pick up their economy over the next couple of years. This is something that governments across Asia do from time to time to try and mobilize momentum in their respective economies—there may be a case for a supplementary package on top of the budget to try and front-load public sector infrastructure projects, and to deliver the reforms that may help the economy (move) forward. The focus on such a package will need to be on spending measures that can be implemented very quickly—there is no point in having visionary changes that will take years—that is not what India needs right now. That can be down the track when the government comes back to office after next general election. Right now, they need action, they need jobs, they need to see a pickup in industrial activity—all this is necessary to build up foreign investor confidence. Otherwise foreign investors may be discouraged by lack of momentum in the Indian economy, and all of the positive dynamics that they were anticipating, but have not happened.
A stimulus leading to a downgrade—that is a chicken and egg situation. If you don’t do anything, then growth will be flat—and if you decide to act, then people begin criticizing, saying that ratings agencies will downgrade us. What is required is a balance—I don’t think this is the time for some huge additional fiscal spending that will push up the debt very much—it should be more targeted approaches that are moderate in scale, and not alter the medium term fiscal outlook. Maybe 0.5% of GDP stimulus—they need to be measures focused on capital investments. It should be about how to get investments to boost key infrastructure projects and create demand for capital goods—that is what is needed right now so that the private sector sees strong demand for their products very quickly within the next couple of months—then they will become more confident and willing to invest. Public sector infrastructure and private sector investment is the priority.
But this will also put RBI under pressure. The government will want the central bank to ease rates—do you think it will oblige?
In the end, RBI has to target inflation—that is their objective. If RBI strays from its objective, it will let the country down and it could create problems for the macroeconomic outlook in the medium term.
The main issue is what is happening with inflation, and if they have headroom to cut rates further. I had argued earlier that they had delayed rate cuts—eventually, they did it, but in the meantime, we wasted six months.
You have to think about the outlook—not just the current inflation rate, but the outlook for inflation. We have seen somewhat high oil prices of late, but our view is that the oil prices will be stable in the year ahead, and around at where they are at now, and not adding to the inflation pressures.
At the moment, inflation in India is still below the RBI’s medium term target rates—India does need to have lower rates. RBI probably needs to take some action, but that is not the solution to reviving India’s growth right now. Lower interest rates are helpful, but the answer has to be stronger measures on the fiscal side. A minor rate cut won’t solve any of the fundamental issues that the country is confronted with.