Home >News >India >We must focus on local demand and not give up on our exports: Jahangir Aziz

NEW DELHI : India’s economy is going through a deep slowdown induced by a slump in demand amid adverse global headwinds that is expected to hinder Prime Minister Narendra Modi’s efforts to achieve the $5 trillion target. The slowdown puts the spotlight on what went wrong, the weaknesses in the economy, adequacy of reforms taken, and what more is to be done. Jahangir Aziz, head of emerging market economics at JPMorgan Chase & Co., an old hand at India’s finance ministry, delves deep into these issues in an interview. Edited excerpts:

Do you think the Indian economy has hit the bottom and is on the path to recovery from here on going to be bumpy or smooth?

It is hard to say whether the economy has hit the bottom. Our measure says that it probably hit the bottom in the previous quarter. The turning points are done. The right way is to look at quarter-on-quarter growth changes rather than year-on-year changes. If you look at a quarter-on-quarter change, overall growth moved to 4.1% in December quarter from around 3.8% in the previous quarter.

However, importantly, if you exclude agriculture and government, which gives a sense of the non-farm private sector economy, then this had actually gone down to 1.8% in September quarter and it rose to 4.4% in December quarter. So on turning point, the September quarter of 2019 was the bottom, it did recover in the December quarter. The question is does it sustain or once again nosedive in the March quarter for a variety of reasons including Covid-19. Higher frequency data such as PMI (Purchasing Managers’ Index (PMI) have not been affected as much so far. So yes, we would think that at least in the March quarter that recovery should hold. Whether it is as strong as the previous quarter recovery, that is hard to say at this point. However, the June quarter is very questionable.

In your recent The Indian Express article, you wrote that exports can no longer be the driver of India’s growth story. Do you think India should rather specialize in a few sectors to make our exports competitive and allow other sectors to perish?

We still tend to think that tinkering with reduction in business cost, corporate tax cut, and giving some protection through increase in import tariffs, can help exports ignoring the fact that the much bigger shock is the stagnation in global trade. I don’t think that it is recognized in the first place by either policy makers or analysts how dependent India is on exports and the global economy and what really has happened to global trade. There are very large structural shifts that have taken place in global trade. Unless you address that shock, these old fashioned, 1970s approach of let’s focus on two or three sectors, does not work in today’s world.

In your piece you suggested a fundamental pivot. You have advocated producing affordable products for the domestic economy. How does that pivot happen?

First, one must recognize that an economy with $2,000 per capita income will not be able to grow only on domestic demand. So the fact that I am saying we need to focus more on domestic demand but that does not mean that we give up exports as a driver of growth. However, coming to your question, it is a very hard call. I am not trying to minimize the difficulty in making that shift. For 75 years, we have been told every day that India is a supply constrained economy and therefore resources need to be saved and used to invest to reduce these supply constraints. Consumption is bad and savings is good. I have not really found any policy, any reform in over the last 70 years that actually promotes consumption at the expense of savings. Not one. Every policy that we have done justifies and aims to increase savings or encourage investment. It is a very difficult pivot. However, just because it is difficult does not mean it can’t happen or doesn’t need to happen. The problem is that we have not even started a conversation around it.

For investment in infrastructure and other stuff, you need domestic savings. If your domestic savings is not enough to match your investment, then you have to borrow from overseas. That means your current account deficit will go up. Is that not a bigger threat to the economy?

For most of the 75 years, Indian households have received negative real interest rates on the deposits. It is only now that inflation has come down that deposit rates have turned positive. So households have provided substantial subsidy to corporate India.

A large part of those savings are precautionary. Households save a lot for retirement, old age health, children’s education, and housing because mostly there is significant uncertainty about the cost of this spending. The only place where in last 20 years there has been some decline in the amount of savings you require is in the housing sector. The ease with which you get housing finance, the improvement in documentation and the entry of large corporates in the real estate market has helped reduce the amount of savings that one needed previously to buy a house. But beyond that there has been almost no change in saving requirements. In fact, it has gone up.

The current account deficit (CAD) for the last two years has been stable, except for the last two weeks. So has the rupee. However, all this has happened because the economy has grown in the 4-5% range. CAD is a problem only if you are borrowing for the wrong reason. If you go back to 2014, in one of the quarters CAD jumped 7-8% of gross domestic product. Most of it if you remember was not because India was investing massively. Instead, people were taking capital out in the form of gold imports. That is nothing to do with CAD. It is a capital account problem that is wrongly codified as a current account problem. I don’t recall any time in India, whether we look at 1981-82, 91-92, or 2013, where the country ran into a balance of payments problem because the CAD increased because of high investment by corporates or the government. It was always because government savings fell because of lower tax or profligate spending on non-capital items.

Do you see any growth triggers in the near future? We have reformed our regulatory architecture in the recent past, which include a new bankruptcy resolution system, a national goods and services tax (GST), lower corporate tax rates, and moderate penalties under Companies Act. Is that not enough to let the economy lift off when the tide improves?

Again, as noted in your own question, you are not saying that the tide will improve because of the policy choices that India is making. You are asking if India will do well if the tide improves because of something else, say exports. Not these policy changes. If the tide improves, all these factors will help.

However, by themselves these reforms still address supply side issues. The corporate tax rate cut, GST introduction, and bankruptcy reform are all meant to reduce the cost of doing business. None of these address the problem that India is undergoing a substantial reduction in both domestic and external demand. Unless corporate India sees there is a sustainable high demand for the next few years, they are not going to invest, however low the cost of doing business becomes.

How do you revive demand in an economy where 500 million people are still not in the demand matrix?

Once you accept the proposition that we need to boost demand, there are many options. Let us look at the last two Union budgets. India had limited fiscal space. However, this limited fiscal space was used not to boost demand but to reduce the cost of doing business. Instead of reducing corporate tax rate, why was not GST rate lowered, say for a year or two?

Interest rates have been coming down from the middle of last year. The combination of a very large consumption tax cut with a largish decline in consumer lending rates would have been a powerful tool in boosting demand. In this year’s budget, on the one hand the income-tax brackets have been changed and on the other exemptions have been taken away. You are not really addressing the problem of limited income power of those in the lower rung.

There are different structural constraints in trying to boost demand. For example, there is a monetary transmission problem. The financial system is wobbly. Despite direct benefit transfers, there are still issues with the delivery of entitlements. Yes, the leakage is still very high. But the transmission problem can be solved tomorrow. The Reserve Bank of India (RBI) can take over all bad debt of bank and non-bank lenders. Then RBI can go to the same bankruptcy courts to recover the bad debt. Meanwhile, the financial logjam goes away.


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