The Indian economy, which is witnessing one of the worst slowdowns in recent years, requires some serious reforms such as improving its financial system and streamlining of goods and services tax system, according to Gita Gopinath, Chief Economist at the International Monetary Fund (IMF).
In an exclusive interview with Furquan Moharkan of DH at her home in Mysuru, she speaks about the pain points in the Indian economy and possible measures to revive it. Edited excerpts:
Your India visit comes at a time when the economy has been going through a prolonged slowdown. What are the reasons behind it?
If you look at India’s gross domestic product (GDP) and the investments – there has been a sharp slowdown there. While investments were not holding up very well in the past, what we are seeing now is that the consumption growth is also showing some weakness. Similarly, if you look at the area where growth is coming from, it’s mainly coming from government spending. The way to describe it is that private demand is quite weak.
There are a bunch of factors that are driving the slowdown. The stress in the financial sector is an important one among them. This is both the banking sector with their non-performing assets as well as the non-bank financial corporations that went through stress in 2018 and haven’t fully recovered from it. Both of these have led to weakening credit growth in the economy. The second area is the farm sector, where rural income growth has slowed and that has had other negative impacts on the private sector demand. These factors including the weakness in the auto sector have contributed to the slowing of the Indian economy.
There has been debate over the cyclical nature and structural nature of the slowdown. What do you think about it?
With the emerging markets, these two things tend to move very closely together, because usually, the countries are undertaking the structural reforms at the same time as the economy is growing. So, it is very difficult to tell apart whether its cyclical or structural in nature. That said, some of this is certainly cyclical because we expect the growth to come back to higher levels than they were in 2019. But some part of it is also structural, because when you have a prolonged period of weak investment, that means there is the lower capital stock going forward or the increase in the capital stock is not as much, which adds the structural aspect to it.
Do you think India needs more measures on the demand-side?
There is a combination of both measures that are being undertaken. So, if you look at the corporate tax cut, you could look at it as supply-side reform. If you think what is happening with the Insolvency and Bankruptcy Code, that is also a supply-side reform. On the other hand, the income transfers to the rural areas is very much a demand stimulus being done. I think what the government needs to bear in mind is that there is not much fiscal space to play with. Especially the consolidated fiscal deficit of India is one of the highest in the G-20 countries. But these reforms will certainly help.
You talked about more monetary policy measures than fiscal stimulus. But consecutive rate cuts by RBI don’t seem to have been transmitted?
Among the demand stimulus, besides the income transfer, there is also the monetary policy stimulus. The Reserve Bank of India has cut rates by 135 basis points. But as you said, the pass-through into the lending rates, if anything, has come down. So, the stimulus hasn’t worked through in the system. So there are reasons for this. What we are seeing is increased risk aversion from the bank side about lending. There is also the fact that the corporate balance sheets haven’t repaired themselves, so their demand for such loans also goes down. So, this system has to be fixed in terms of quicker resolution of NPAs – it is taking longer right now. But now some precedents have been set and that process can become much faster. But these aspects are certainly playing the role.
Is below par revenue growth of the government a cause of concern?
Well, it certainly is not where it was expected to be. The goods and services tax (GST) revenue growth was expected to be higher than what has been coming in. There is a good argument to streamline the GST. There are many slabs and there are still movements across the slabs, as to which product goes into which tax bracket. So, there remains uncertainty over it, and that needs to be streamlined and fixed so that there is greater compliance. You need to get more revenue from the GST.
How bullish are you on India’s growth going forward? And why?
India has tremendous potential. And if you think relative to where the economy is and where it can be, there is a long way for it to go. In that sense, if you look at the labour force, and the capital investments that need to take place, there is a lot of low hanging fruit for the growth in some sense. However, to accomplish that, it would require some very serious reforms, and some of them are trickier than the other – which is on the labour and land reforms. And also improving the financial system. It’s not enough with the steps that are being done. You have to complement it with better governance in the financial system. It is not only the stock problem of only the NPAs, but you also don’t want to create more NPAs going forward. So, there are many reforms to be undertaken. But, I mean, India is a country with tremendous potential and investors across the world are looking at India as the next growth engine.
Make In India was aimed at making India’s manufacturing better. But the rate of realisation of investments is very low. Why?
To get India to be a major manufacturing centre, I think a couple of reforms need to take place – which is on labour and land, in terms of easy land acquisition. Also, there needs to be much more infrastructure built so as to become a big part of the global supply chain – the distance between ports and factories has to be reduced. A lot more needs to be done for India to realise the dream of becoming a manufacturing hub.
You talked about regulating the financial sector. Is RBI doing enough?
You have to do it in different ways. I mean RBI has actually done quite a bit in terms of regulations. They have been vigilant about the developments that have been taking place recently. But what is also needed is a faster resolution of some of the legacy issues in the banking system, like NPAs. The National Company Law Tribunal (NCLT) was set-up for this purpose, but it has taken longer than that was stipulated by the law. You might need to build more institutional capacities in these areas.
Global trade war has been going on. India was seen as a beneficiary. Has it been able to capitalise?
It was expected with the global supply chain shifting that other countries would be beneficiaries for it. I don’t think people immediately assume that India would step in because they are aware of the fact that there is still an infrastructure deficit in India. Nobody expected that to change dramatically. But I do think this is an opportunity. India is not a major part of the global supply chain and it’s certainly an opportunity for India to step into that space.
Is India ready for it?
I think it will take a little bit of time. I don’t know whether it is going to happen imminently, it’s certainly the direction the Indian government should go.
How willing would you be if you get an opportunity to work in India?
Well, I don’t like to speculate on these things. I am certainly not looking for a job. I have a job.
What are your memories of Karnataka since you are from here?
Oh! I have many memories. I went to Nirmala Convent, then I went to Mahajana College. Of course, first big and major memories are with the friends I made when I was here; I am incredibly close to them. I love speaking Kannada. Unfortunately, it might sound rusty right now, but it has been a big part of me growing up. And I like Mysuru, it is a great city.
In your busy schedule, how easy is it to maintain personal friendships?
The good thing is that social media is so much great. It is so much easier to communicate now. So you don’t need to physically be next to each other. We are still very close.