Debating India’s Growth Slowdown With Neelkanth Mishra And Sajjid Chinoy
Neelkanth Mishra of Credit Suisse and Sajjid Chinoy of JPMorgan debate the growth slowdown and the fixes needed.
The slowdown in the Indian economy, now apparent from data such as weaker GDP growth, plummeting auto sales and falling core inflation, has prompted calls for corrective action. Options range from monetary support in the form of lower interest rates, to fiscal support via tax cuts to boost spending, to fixing longer-term structural issues facing the Indian economy.
Determining the best course of action, though, needs two fundamental questions to be answered:
- What led to the growth slowdown in the first place?
- And what are the least disruptive policy options to correct the slowdown without throwing caution to the wind?
BloombergQuint spoke to Neelkanth Mishra, chief India strategist at Credit Suisse and Sajjid Chinoy, chief India economist at JPMorgan for their views.
Why Did Growth Slow?
Mishra believes the cause of the slowdown, to a large extent, is tight monetary policy. Money supply, as measured by M3, has fallen. This, according to Mishra, has damaged the economy as it led to shortage of money in the economy.
M3 growth has been below GDP growth for almost three years. M3-to-GDP is down by almost 6 percentage points. This is reflective of super tight monetary policy. Some of this happened inadvertently because the MPC did not expect inflation would stay so low. But it has already done its damage.Neelkanth Mishra, Chief India Strategist, Credit Suisse
Troubles faced by the financial sector, particularly public sector banks, which has reduced the system’s capacity to lend, have added to the pain of tight monetary policy and hurt the real sector, said Mishra.
Chinoy believes the issues are more fundamental than that.
Over the last five years, consumption has been the only engine of growth in the economy. Net exports have subtracted from GDP each year and investment has been slow.
When consumption growth is outstripping income growth and you are dipping into savings to finance consumption, there is a natural limit on how far that growth can run. So, to me, this is a much simpler story where household savings are coming down and that can’t continue. What’s compounded that is the NBFC slowdown. In the rural economy, once again the story is straight forward and that is that in three to four years, the terms of trade have shifted against farmers.Sajjid Chinoy, Chief India Economist, JPMorgan
Chinoy added that what the economy is facing is a kind of perfect storm—falling household savings, lower food prices which have hurt farm incomes and the NBFC shock, which has impacted leveraged consumption. Slowing export growth has also contributed to weaker growth, Chinoy said, adding that few countries have seen rapid economic expansion without strong exports.
Do Rates Need To Come Down?
In line with his analysis that tight monetary policy is a significant factor behind India’s slowing economy, Mishra argues that the policy repo rate needs to come down by another 75-100 basis points from the current 5.75 percent.
The term premium (which is reflected in the gap between overnight repo rate and the 10-year benchmark bond yield) and the corporate credit spreads (which reflect the additional amount corporates pay over government bond yields) also need to correct.
I think it (high rates) is because of poor signalling (of inflation and of monetary policy stance). Another problem is that we lack clarity on what is the real neutral rate (nominal interest - inflation, given a neutral stance). If we know that we are looking at a real neutral rate of 1.5 percent, the market can respond to that expectation. I think as the bond market starts to front run the rate cuts, the term premium will come down.Neelkanth Mishra, Chief India Strategist, Credit Suisse
Chinoy believes that while there may be some room for further cuts in the policy repo rate, the problem of high market interest rates and elevated borrowing costs is linked to the government’s fiscal position.
Total public sector borrowings, which include centre, state and public sector enterprises are close to 9 percent of GDP. This, according to Chinoy, is absorbing almost all of the household financial savings and crowding out private borrowers. As such, even if the MPC were to cut rates further, transmission of lower rates into the economy will be limited, he argued.
Chinoy believes that while lower rates and easier liquidity will help to some extent, a much more holistic solution to the growth problem is needed.
It will be a mistake to put all of the ills of the economy on the doorstep of just policy rates or liquidity. We have to accept that investment-to-GDP ratio has been falling for seven to eight years now. It has pre-dated the pick-up in real rates. Therefore, this is an opportunity for the government to begin to do some of the heavy lifting...I don’t think doing an asset quality review of non-banking finance companies gets easier if rates are lower...I don’t think land acquisition becomes easier if rates are lower...I don’t think the power sector problems go away if rates are lower.Sajjid Chinoy, Chief India Economist, JPMorgan
Should The Government Loosen Fiscal Policy?
Where Mishra and Chinoy agree is on the need for the government to stay on the path of fiscal consolidation.
Mishra believes that the government should not undo the progress made over the last five years by giving in to calls of a fiscal stimulus. He expects the government to retain a fiscal deficit target of close to 3.4 percent of GDP.
Chinoy believes that a credible fiscal roadmap is important at this stage to ensure that transmission of easier monetary policy continues.
I think its important that fiscal policy is not pro-cyclical and accentuates the slowdown. because then you would get stuck in this hysteresis. I would worry less if the number is 3.4 or 3.6 percent...I would look at total public sector borrowings. More importantly, I would look at the credibility of the assumptions that underlie and what’s the roadmap the government gives to the bond market for the next three-five years.Sajjid Chinoy, Chief India Economist, JPMorgan
The answer, according to both, lies in finding additional resources in order to help maintain expenditure. Asset sales and disinvestments are one way to do this, said Chinoy and Mishra. This could include some amount of asset recycling, said Chinoy.
The government is sitting on so much land, from golf courses to stadiums... NITI Aayog gave the government a list (of possible divestment candidates) in 2016. But another area, where the government can use its political strength, is that there has been a natural reluctance within the permanent bureaucracy to let go of control of some of these assets. That can be addressed.Neelkanth Mishra, Chief India Strategist, Credit Suisse
We’ve done a lot of difficult reforms in the last five years but they are running their course, said Chinoy. To get a burst of growth to 7-8 percent, without the tailwind of exports, we’ll have to revisit the reform options. A lot of the options, like land and labour reforms or bank privatisation are hard. “Within that menu of reforms, selling down assets is low hanging fruit,” Chinoy said.