In an interview with ET Now’s Mythili Bhusnurmath, Subir Gokarn , ED, IMF , says in India‘s case, the transitory effects of the demonetisation and the implementation of GST should be wearing off and that takes us to a more sustainable trajectory.
It is almost a year since you spoke to ET Now last and since then I think global recovery seems to be more or less on track. The IMF in October had lowered growth estimates for three economies the US, the UK and India. Since then, the US growth has actually been much stronger than what the fund projected. Can we hope that in the case of India too maybe we will see a better bounce than the IMF estimated?
You are right to say that the global prospects have improved from the IMF’s perspective considerably. The entry of Europe into the recovery zone and the consolidation that the recovery is contributing to global momentum and the emerging markets are holding course. There are not any significant immediate risk factors or threats visible. The US growth outlook earlier was premised on significantly infrastructure spend which the new administration was talking about quite enthusiastically early on. That seems to have dimmed a bit and that has resulted in the growth forecasts being brought down. For India, the first quarter number and so on has a bearing on the forecast but even in their baseline, there is a recovery expected in the second half of the year. If you take 5.7% of the first quarter, the rest of the year as per their forecast is around 7%.
But we did see a much better second quarter so…
6.2-6.3%. Now the implication is that the second half will be that much stronger. Of course, forecasts are forecasts and we have to look at what underlies them. In India’s case, clearly the transitory effects of the demonetisation and the implementation of GST should be wearing off and that takes us to a more sustainable trajectory.
From October till now, do you see any dramatic change in India that would make you think that maybe there is a case to revise India’s estimates? Of course, we have to wait for the next WEO, but as of now?
Well the update will come in January. That is a bit too short an interval to see things. The more detailed revision of forecasts comes in April. That is when we will have a sense. Of course, we would not know the exact numbers but one thing that is important to keep in mind is India’s sensibility to global growth is also quite high. You recall the high growth phase when the global economy was growing at 4% plus? India got significant benefits as it started to integrate more and more closely. As the global economy recovers, it will provide some tailwinds and some boost to the Indian economy as well.
IMF’s position has always been to have sustained growth by multilateral cooperation across borders, across sectors. We are talking in a world where we are increasingly seeing that breaking down — whether you are talking about the recent collapse in the WTO talks or when they are talking of US pulling out of climate change talks and even out of TPP trade pacts. The US increasingly wants bilateral kind of negotiations. So, the world is increasingly turning protectionist and there is no cooperation across borders. What is really going to drive growth? Will it be advantage advanced economies once again? Will the emerging markets and countries like India lose out in the process?
Well, this is absolutely right. The funds outlook short term is quite positive but it flags several concerns for the medium-term prospects and there are three or four that they have been highlighting over the last couple of years. One of them clearly is the trend in trade and what appears to be the momentum towards protectionism. In one of the recent views, there was an excellent chapter on the increase in or the decline in trade and the factors have explained trade growth.
Global trade ceased to be an engine of growth post financial crisis. Global trade is now growing more or less. Global GDP is at half of its growth rate before the crisis. So, as an engine of growth concept, it is clearly flagging.
Protectionism as one factor that is contributing to this base or plateauing of supply chain arrangements is kind of correlated to the extent that countries were starting to look inwards. That is of course a reflection of slow growth itself. You might see that as growth recovers through other forces, the pressure to protect may also go down but I do not think we can take that for granted. It is clear that the protectionist tendency we are seeing in the western and the advanced economies may continue and end up putting more restrictions on exports from emerging markets.
Countries like India with very significant domestic capacity and potential have to try and leverage that as much as possible and revert to the old recommendation which is clean up your own house and fix the roof while the sun is still shining. Structural reform is a measure that is being pushed very hard and very aggressively and there is certainly merit to it. Now what exactly each country needs to do for itself is a matter for the country to decide on priorities and sequences and so on.
For India, the infrastructure remains a key challenge as a way to both boost demand and capacity but alongside, we are clearly trying to find out ways to enter into arrangements so that at a multilateral level, where the WTO is starting to show some signs of fatigue, regional arrangements will allow India to access fast growing markets. That is very important and the fact that we are in Asia and we have an option to plug in different ways to the Asian trade. Asia will remain the fastest growing region in the world and that is a necessary pivot. So far, our export focus has been on the advanced countries and legitimately so.
We are starting to look at a few markets. We have done this periodically in the past but there is a compulsion to do it now particularly as we are seeing signs of multilateral trade plateauing. On climate change, clearly the question is do we do things when we know that our contribution to the global solution is not looking very significant? That is a dilemma that lots of countries are facing and somewhere the realisation that it is either all or nothing especially as large economies back out. This has more to do with diplomacy and most of collective activities is very important.
You said that global trade can no longer be the engine of the growth but actually there is a lot of hope that with global economy recovering. Even if the WTO does not survive in a robust form, global trade could still perhaps be the engine of growth. In fact, global trade growth at about 4% is higher than global GDP growth. So, maybe we will see a reverse and in India there is a view that our growth has been constrained by flagging exports. How much will the strengthening of the rupee hold back our exports or should we look only at the domestic market because we do have a very large domestic market and do we need to depend on exports as much as many of the other countries during their growth phase as China, the East Asian Tigers?
We should recognise that particular phase and that opportunity is perhaps behind us. A number of factors are contributing to this but I do not think we should be looking at exports as the only engine of growth. Just as China has started to pivot from export to domestic consumption. But that requires a very fundamental restructuring of production system because what they were selling abroad is not necessarily what the average Chinese consumer is going to demand. So, that requires a shifting. We have not been that dependent on exports. So for us, the domestic market has been generally more dependable or but the bottom line is that we do not want engine. The fact that the global economy is recovering, will probably boost exports and we will see some recovery in exports just from that. Exchange rate apart, keep in mind that many of our most successful exports right now are sort of tech driven in a sense the auto supply chain is very important, the pharma has been very important. Our basket is not that of garments, footwear, labour intensive. We have a very diversified basket. As we look at the diversity, each of these perhaps requires somewhat different set of priority. Exchange rate is common across all of them but more important in the merchandise garments and footwear.
We do not subscribe to the view that exports have really constrained the growth process. The exchange rate in the sense of not allowing the rupee to appreciate would perhaps solve a lot of problems because we have excess capacity.
I have never been of the view that exchange rate policy has been driven strictly or exclusively by competitiveness. I do not doubt that it is an important consideration but to consider that as the only factor to me is a bit limiting. I would prefer to think of exchange rate policies in the larger context of macroeconomic stability of external balance and what capital inflows and the role the risk associated with these play in determining how you manage your exchange rate.
Yes, if it is overvalued, there is an impact on exports but to me that is not the only consideration. What we need to focus on when we are talking about exports is to find ways of improving competitiveness.
The logistics cost of getting from producer to port, turnaround times in port — of course all of those are very important factors which really focussed on the issue of improving competitiveness scale. We have always had issues with scale, labour, job security regulations in the context of the textile and garment industry. I represent Bangladesh. Bangladesh has 80% of its exports coming from the garment sector. Now that is a huge exposure and a huge risk but one has to look at the policy framework within which their garment sector has reached these levels and the flexibility in labour markets is a critical element.
We are seeing asset prices shoot through the roof particularly in stock markets. Is the IMF concerned about these or potential asset bubbles? Should central banks everywhere also be worried because we are seeing the Fed is on course to increase interest rates thrice in 2018 and also thrice in 2019? How much will the overvaluation over there, play a price in determining monetary policy?
The fund has a companion publication called GFSR — the Global Financial Stability Report and over the last two years, it has been flagging this risk. The quantitative easing that many of the advanced economy central banks did in the face of the crisis, clearly that liquidity has to find its space somewhere and earlier we found it going into commodities in a big way from 2010 to 2013-2014.Oil and other commodities along with gold surged. After that, as the rollback started. these commodities normalised but other assets, financial assets are surging. Real estate perhaps has not been the early boomer in this but we are starting to see signs of that as well. It is inevitable that if we got excess liquidity in the system, asset prices are going to rise.
But not all asset prices. We are seeing the beginning of a commodity cycle reversal. It is primarily in the stock market it seems very marked?
That is because you are buying stocks of companies that appeared to be very well hedged. Look at cash hordes of companies. This is a point that a lot of people have been making in last two or three years. They are sitting on large amounts of cash and are very safe financially. They are not under stress and excess or normal liquidity is going to reflect somewhere. Like water, any fluid liquidity finds its own level. That is going to result in inflation or in inflated asset price.
Will we see the synchronous global recovery being in some way threatened by a synchronous global tightening by central banks and can India afford to be part of that global tightening?
We are already seeing this and it is important now for central banks globally to sort of anticipate that as the US has started tightening. The taper tantrum was a real live example of how disruptive things can be but also let us not forget that when the taper actually started, the disruption was minimal. So, there is some understanding that is happening both in markets and in the policy making circles. This can be managed or it can be disruptive. The Fed is very consistently communicating what it expects to do, so that has become kind of now been built into the systems. People anticipate this and it is a plausible scenario that this adjustment will take place without too much disruption. Asset prices may correct but they may not correct as disruptively as they did in the first taper tantrum of May 2013. That would be good for everybody.
If globally all the major central banks are on a tightening phase it becomes very difficult for a country like India to also not be in a tightening phase and that might constrain our degrees of freedom, from the point of view of growth.
Well, partly it depends on what the interest rate linkage is. We, of course, have liberalised capital inflows into our debt segments for the years, starting perhaps 2011. That was the time when our current account deficit was very wide and we needed more funds. That situation has changed. There are limits which are at this point being exhausted in many categories. We may not have that direct linkage. Now, of course, money will flow out from the debt segment but if this is a relatively small part of your total exposure, it may not be that disruptive.
On the other hand, if our growth is improving and we are starting to see returns to equity sustaining the currencies in a relatively stable way because you have relatively narrow current account deficit and large reserves that may induce the portfolio investors into equities to remain in position, so that you could have a situation which is unlike in what was a key factor in 2013. Current account deficit was close to 5% of GDP and that was big vulnerability. Now, 2.5% is where we can be reasonably comfortable and that vulnerability is therefore much lower. I would not be too concerned about the response within or the external capital exposure to these adjustments and bring them very slowly. They have been announced well in advance. Sometimes they are announced and not done depending on local conditions. To me, that seems to be a very conservative gradual non-threatening kind of move, One cannot say if it will work but it is better than the sort of jerkiness that is giving the globe much pain.
Is it going to be increasingly difficult for countries like India to frame monetary policy looking at their domestic requirements because increasingly what happens beyond your borders perhaps have a much larger impact than you would like it to have?
That is my general point. It depends largely on the composition of capital inflows. If your capital inflows are structural in the way which attracts capital because of domestic prospects, then you do have some greater degrees of freedom. If you are dependent on debt flow arbitrage which as soon as interest rate outside goes up, leads to a more vulnerable situation, can be demonstrated in 2013, when because of liberalisation our exposure to that arbitrage was much greater and it showed. Keeping the focus on domestic growth sustainability, macro stability and so on is really going to help us and in that regard we are doing reasonably well.
As far as commodity markets in general are concerned, is oil a big threat as far as particularly countries like India which are dependent on oil imports or do you see oil stabilising at about $65 to the dollar seems okay and we can manage and anything beyond $65 would be very dangerous for us?
There are two factors driving oil prices. There is a sort of supply demand issue which is structural in nature. Global recovery combined with OPEC plus ability to suppress production is taking it to those $60-70 range. Then you have a few transitory factors, you have the hurricanes in the Gulf of Mexico, Atlantic you have the Brexit disruption recently. All of these will have impact but will be essentially temporary in nature and can be hedged against to some extent. The Shale is a big factor here, the Shale rig count.
But now we are not seeing Shale coming in more strongly at these levels.
Above that $65, you start to see the rig counts increasing. It is really a matter of time before it enters the system and Shale is a very easy, very quick recovery. The ability to get things going very quickly will demonstrate that there are some regulatory issues in terms of where fracking can take place and so on. The expectation is that Shale is a credible price capping source of supply. For prices to shoot above where they are now and stay there like we saw in 2010-2011 with the presence of Shale is unlikely. There is a relatively low risk of prices spiking, this level is being supported by the medium-term supply demand balance and we should be building up our fisc planning, our balance of payments anticipations and inflation projections based on this.