India’s ‘One-Trick-Pony’ Growth May Not Turnaround Anytime Soon, Says Rajeev Malik
India’s GDP growth isn’t going to revive soon and may slow further, says Macroshanti founder Rajeev Malik.
India’s one-trick-pony growth by relying on private consumption won’t revive anytime soon, according to Macroshanti’s Rajeev Malik.
The seeds of a slowdown in India were apparent even at the beginning of the year when global growth was healthy, said Malik. Now that there is a global slump, there will be a pronounced impact on India’s gross domestic product, the investment firm’s founder and director told BloombergQuint in an interview.
India’s growth has been a “one-trick-pony” relying on consumption which had been held up largely by debt financing. That waned after a credit crunch among non-bank lenders last year. With 3-4 years of strong private consumption growth, there is a natural tendency of a slowdown in momentum, said Malik - a former senior economist with CLSA.
“There is no reason to think growth is going to turn around anytime soon. We could clearly be down in the dumps for longer simply because my main assessment for India remains—it’s like a truck with a messed-up gearbox. You can change the tires, you can paint it, you can do wonderful things, but will you get the gearbox going?” said Malik.
That, to a large extent, is the financial system, he said. A number of domestic factors have led to a slower growth in India but this is about to get complemented by external parameters as well now, he said. “It is both cyclical and structural in nature.”
India’s economy is struggling to break free from a slowdown where sales of consumer goods—from cars to biscuits—have fallen and inventories are piling.
Slowing consumption serves as a double whammy to an economy that for a few years has been witnessing stagnation, or meagre growth, in investments. Gross domestic product growth slumped to 5.8 percent in the quarter ended March 31, dragging FY19 GDP growth down to 6.8 percent. In its last bi-monthly policy, even the Reserve Bank of India cut its growth forecast to below 7 percent for 2019-20.
“RBI governor may not think so about the structural angle but all you have to do is ask yourself or any analyst whether her expectations about trend growth in India have come down,” Malik said. “That clearly will tell you about the structural dimension at play.”
Need More Than A Fiscal Stimulus
Malik, who was surprised at how quickly the calls for a stimulus rose after a union budget that spoke of fiscal discipline, said a “plain vanilla stimulus” will not do.
“It should be complemented by some long-overdue reforms, be it on the factor markets, be it on the financial sector side. These are tangible issues, which will make any kind of stimulus more effective,” said Malik.
The stimulus has to be accompanied by monetary easing—more than the 110 basis-point rate cut RBI’s monetary policy committee has announced through the year. As for the size of the stimulus, Malik said he’s not hopeful about an “aggressive, big package that comes and does everything”.
“My sense of this government is that, it’s not going to lose its head about the speed or the nature of the slowdown. And as typically happens, you know, the child that cries the loudest, will get most milk. In India’s case, the sector that’s making most noise about the slowdown and its implications especially politically sensitive job creation will probably land up getting some goodies,” he said.
Watch the full conversation here:
Edited excerpts of the conversation here:
What is your understanding about the state of the economy right now?
The most surprising thing to me is how surprised people seem to be about the unfolding slowdown. The signs of this were apparent even around the beginning of the year. If you think of the budget, which was a short time ago, there was no hint in that, that the state of the economy would warrant some kind of a stimulus package. The budget certainly didn’t talk about it. So I find it perplexing as to how quickly people have shifted the narrative from talking about how non-agriculture growth was strong and core inflation is high and, therefore, the MPC should not cut rates to now completely going the other way.
The fact of the matter is, India had started to slow down even as global growth was holding up well. Now that it is going the other way, we will see a more pronounced impact of that.
To a large extent, India’s growth was predominately a one-trick pony, relying on private consumption which had been held up in large part by debt financing and post the NBFC crisis late last year, a lot of unraveling has taken place. So, after three-four years of strong private consumption growth, there is a natural tendency of momentum to slow down. We were beginning to see some signs of that, but then it got whacked by the whole NBFC fiasco and that further slowed things down.
That is now getting overlapped with global growth dynamic which is going to play out much worse. There is no reason to think that growth is going to turn around anytime soon. We could clearly be down in the dumps for longer simply because my main assessment for India remains that it is like a truck with a messed-up gearbox. You can change the tires, you can paint it, you can do wonderful things, but will you get the gearbox going? That gearbox to a large extent is the financial system.
So, to a large extent the slowdown has domestic drivers and it is going to get complimented by external parameters as well now. it is both cyclical and structural in nature. The RBI governor may not think that there is a structural angle but all you have to ask yourself is whether expectations about trend growth in India have come down? That clearly will tell you about the structural dimension that is at play.
Should there be a stimulus at this juncture and if that be the case, what are the options?
There are three options to deal with any kind of a slowdown. One is a fiscal stimulus package, the other is monetary easing and the third, somewhat related to the second, is exchange rate depreciation.
India has not really, aggressively followed the third option so let’s keep that aside for a moment. That leaves us with fiscal and monetary policy. We’ve already seen monetary easing come through. My view remains that the MPC has been slow off the mark and has moved gingerly. It could clearly have been more aggressive and even now it can be more aggressive given the head room it has.
At the same time, the issue is, a plain vanilla stimulus by itself is not really going to do much. It should be complemented by some long overdue reforms, be it on the factor markets, be it on the financial sector side. These are tangible issues which will make any kind of stimulus more effective.
My sense remains that investors and financial markets are always betting on a bigger, more aggressive stimulus than what is going to come about. My sense of this government is that, it is not going to lose its head about the speed or the nature of the slowdown.
What typically happens is that the child that cries the loudest, will get most milk. In India’s case, the sector that’s making most noise about the slowdown and its implications, particularly politically sensitive job creation, will probably land up getting some goodies. But it is going to be targeted and predominantly sector-specific on the private consumption side and maybe a bit on infrastructure.
I would not be too hopeful about a very aggressive, big package that comes and does everything. I don’t think that’s on the table.
On the structural side, it is largely the financial sector that worries you? Some analysts have pointed to the fact that the savings rate has been slightly declining and consumption as a percentage of the GDP has been going up. Is that also an issue?
It is. Our household indebtedness is really not as high or as worrisome as some of the peers. But it’s fair to say that there has been a combination of the savings rates going down and private consumption actually holding up quite well. Debt has clearly been the intermediary there. That actually can’t continue forever, and something has to give.
Is that a structural or a cyclical slowdown? Well if you think the debt financing can continue forever and ever, obviously, there is nothing wrong with it. But that is not really the case.
It is also interesting that once again, India is showing that it is difficult for it to maintain a high growth phase. We’ve been through this cycle, different cycles, different cross currents, different pressure points. But sustaining growth at a high level in India’s case has always been challenging. And once again, that is coming about to be the case.
My sense is, both the etiology of the slowdown and what needs to be done, both are a bit, in a limbo. We have selectively tried to ignore some of the signs that were indicating that a slowdown is imminent.
If you look at MPC’s growth forecast for the last several sessions, it is absolutely amazing. It has been cutting its growth forecast by a miniscule 0.1 percentage point every few months. They clearly had the option of stepping up and trying to come up with a more aggressive interest rate response, fully well knowing that the transmission is being weak. That, to me, argues for a more aggressive option not a more timid option.
If the government were to respond with sector specific measures as you were indicating, it really does not have the fiscal head room to go and spend. Where does the money come from you think?
As I often say, policy making is about solving a problem without creating another one. And as you rightly pointed out, there is not much fiscal headroom which is precisely why it is not going to be a big package, so to speak.
There is a natural slowdown unfolding. Don’t also forget this government has relied much more on micro-economic delivery rather than macro-economic growth.I think the election result itself showed that quite effectively. So, I think a slowdown, unless it is very pronounced and has a catastrophic impact as far as job creation is concerned, will not lead to a big aggressive, ‘be-all’ and ‘end-all’ kind of a (fiscal) package.
As for the fiscal position, even if you go by the official numbers or if you actually take a more realistic picture, the actual fiscal picture in India is far more expansionary than what the official numbers suggest.
So to me, between the fiscal side and the monetary side, I would say that there is more scope on the monetary side as long as the MPC does not move in a very gingerly manner as it has been doing. But ultimately, as it happens in India all the time, it will be a little bit of everything. A little bit of fiscal, a little bit of monetary easing will come together to try and carry the burden.
How would you judge room for further rate cuts?
The MPC in its recent meetings has only created a lot more confusion or uncertainty in a way. Earlier we had some kind of hand-holding guide in terms of real interest rate that has completely been thrown out of the window because nobody talks about it anymore. But at the back of their mind, there would still be some kind of a benchmark.
I would think, the repo rate going down to 5 percent is not outlandish at all. Now the question is, should they move aggressively and do it? Will they do it as a bullet 40 basis point cut or will they do it in doses of 15 and 25 basis points? I mean those are really silly combinations that we are dealing with right now. No other country does that. I don’t want to bring up China and Taiwan again which is what everyone is trying to use to apologise for this 35 basis point cut. They have not followed India’s pattern and they certainly are not the benchmark or the yardstick for monetary frameworks.
So, I think there is another 40 basis points to come through on the repo rate, at least. Whether it has comes as one step or two steps is anybody’s guess.