‘Tech import curb regressive, doesn’t augur well for future‘

Edited excerpts:

Is double-digit growth a thing of the past for India?

It is going to be a big challenge in the next seven years. Global growth is going to be relatively low. The same is true for global trade. So, the external environment is clearly not as conducive for us as it was between 1992-2010. To get higher growth rates, investments need to go up. Public investment is better, but private investments need to go up further. To get 8% growth, you need something like a 37% gross domestic investment. We are currently far from that. These things will not happen unless companies grow faster, and this includes higher export growth. The annual growth of merchandise exports, for example, has been at 4% or lower in the last 10 years. This grew at 20% the decade before. So, to achieve 8% plus growth, gross domestic investment has to go up to 40% of GDP.

For investments to go up, savings need to go up. Strangely, gross domestic savings have contracted since 2010. It has two components, corporate savings and household savings. Trade growth also needs to be higher. But this is not expected to increase more than 5% in the next 10 years.

If we want to have 8% plus GDP growth, investments, savings and exports are crucial. Indian industry must become more competitive to be able to replace other countries’ exports.

What should be our focus in trade?

We have to focus on the East. If India doesn’t do that, we are not going to grow as fast as we like. We must be a part of the global supply chain. In fact, even to enhance exports to Europe and North America, we will not be able to do it unless we are part of the global supply chain, which is to the East of us. A recent announcement that I find most disturbing is (licencing requirements on) imports of computer hardware items, which is exactly the opposite of what we should be doing. We have to be connected to the Asian supply chain for us to be competitive in manufacturing of laptops, desktops, tablets and other computer equipment. That is what we need to do rather than shutting them off. So, this regressive move doesn’t augur well for the future.

How should India view the China narrative vis-a-vis trade and the global supply chain?

We must remember that if China’s exports are high, so are their imports. China’s latest annual import bill is $2.7 trillion, while India’s aggregate merchandise exports are about $450 million. We should see what items they are importing and where we can be competitive. In 2022, India, the fifth largest economy in the world, ranked No. 31 in terms of exports to China.

Even Ireland exports more to China than we do. We need to look at things more dispassionately. We should look at where the markets are. If you look at Asia, you have China, Indonesia, South Korea, Thailand, Vietnam and a whole host of other countries, apart from Japan, which are growing. In the next 20 years, even if these countries grow at 4-5%, it’s a large market for India to tap. The West is not going to grow as fast. These are the markets where we can sell our goods. But we have to be a part of either RCEP (Regional Comprehensive Economic Partnership), the IPEF (Indo-Pacific Economic Framework) trade pillar or CPTPP (an agreement for trans-Pacific partnership) trade blocs. Otherwise, we are out of the global supply chain. This will even impact exports to the West.

Your views on MPC’s action on interest rate?

I have never commented on specific actions by the RBI on monetary policy ever since I stepped down as deputy governor. However, what I can say is that our current rate is now slightly real-positive (higher than inflation). Therefore, I don’t believe that there is a need for any significant monetary accommodation as long as the current rate is real positive. Which is good for the economy. Savings, which are sensitive to real interest rates, have come down significantly in the last 10 years or so. You need positive real interest rates (higher than inflation) for savings to keep up, so there can be an argument for somewhat higher interest rates. Increased savings can then can finance the higher investments that we need for growth.

What steps should be taken to address concerns related to food inflation?

These days there is a big spike in the price of tomatoes, which has brought inflation into focus. Such spikes in the price of food items happen every now and then, particularly in specific fruits and vegetables due to local supply problems. Such spikes do not imply any kind of trend and are usually transitory. Hence, they are not amenable to treatment through monetary policy, unless they are prolonged and feed into generalised core inflation. The correct treatment for such kind of price increases is for the government to do some kind of supply management. It sometimes works, sometimes doesn't. Banning rice exports, because of domestic rice price increases, is not a good idea. If you are a significant player in the export market, which India is, there needs to be some degree of certainty in supply.

However, in the medium and longer terms what needs to be looked at is how good the supply chains are, which means cold storages, warehouses, refrigerated trucks and so on, which to some extent implies larger scale retail formats. Because of urbanisation demand for superior food items like milk, fruits and vegetables and other perishables increases continuously. The catchment area around cities is limited, so unless there is a good cold supply chain, there can be a continuous upward pressure on the prices of such items.

DEA's monthly economic survey for July pegs India's medium-term growth to strong domestic consumption. Do you agree?

If you expect to grow at 6-6.5% without any special measures, you double in about 12 years in terms of per capita income. I would differ somewhat from what the government is saying. Though, a good part of our growth, demand will indeed come from domestic consumption, it's not correct to say that we can't get more growth from exports. If exports grow, income grows, and so domestic demand grows too. So, both are not mutually exclusive.

Private investments haven't really picked up. What do you think are the reasons?

As far as I can make out, growth in private investment has indeed begun. It is still to pick up as much as we would like it to. What is very interesting to look at is that total corporate profits as a percentage of GDP at their peak, around 2008-09, amounted to about 7% of GDP. In 2020, this has come down to 1% of GDP. It has been coming up since then, but only gradually. It will take some time for that to increase further. 

For corporate private investments to go up, you need an increase in both equity and debt. A lot of equity comes from internal accruals. For that to happen, profits will have to go up. There are currently reasonable indications of profit growths taking place. So, I think it's still early to say how much private investment can grow.

How has the tightening of the monetary policy in the West impacted India?

First, it's not really correct to say that monetary tightening has been taking place in developed countries. In Europe and in the UK, the policy interest rates are still lower than inflation. Hence, the real policy interest rates are still negative. So, one can't say that monetary policy there is particularly tight. What is correct is that they have been reducing the gap. In the US, real interest rates have just become positive, as they have been rising continuously for some time. The job market, however, still seems to be tight. 

The rising policy rate has had an impact on the bond market. As interest rates rise, the value of bonds comes down, so investors invested in fixed income instruments make losses. It can also impact the stock markets. Interestingly, the impact on stock markets has been muted. 

In terms of impact on India, it can have an impact on temporary flows, like portfolio flows. But, in terms of FDI, it doesn't make much difference. There's a general expectation that India will grow at 6%-6.5% annually during the next 6-7 years. These expectations are what will drive FDI.