Few economic experts in recent
months have been as critical of India’s fiscal policy and governance and as
bearish about the country’s economic future if reform does not happen as Rajeev Malik, senior
economist with CLSA Asia-Pacific Markets, an independent research and brokerage
firm.
Several recent indicators suggest
that his bearishness is not misplaced. In November, Mr. Malik warned that India’s currency could fall to 57
rupees to the United States dollar (at the time it was trading at about 52 rupees
to the dollar). On Friday afternoon, the rupee was trading dangerously close,
at 68.2 to the dollar. In December, he cut India’s economic growth forecast for
the fiscal year that began April 1 to 6.3 percent, a forecast that has just
recently been echoed by other economists.
Courtesy of CLSA Asia-Pacific MarketsRajeev Malik, senior economist at CLSA Asia-Pacific Markets.
In an interview with India Ink,
Mr. Malik discussed Wednesday’s petrol price increase, what the government
should do next and what role he thinks Sonia Gandhi, president of the
Congress Party, plays in stifling economic reform in the country.
Q: What are the options available
to the central government and the Reserve Bank of India to slow the rupee’s
free fall?
A: The ball is very much in the
government’s court and with Sonia Gandhi. The R.B.I. is doing whatever it can,
and is taking a sensible approach. The last thing it should do is effect a
particular level [for the currency] and then
defend it at the cost of losing a large amount of foreign reserves. There could
be greater pressure in the future on the currency from heightened global
aversion, so it would be suicidal to squander reserves.
In all of this, the R.B.I. cannot
be the savior. No central bank can be the savior. The Indian government creates
the mess and the R.B.I. is the vacuum cleaner, but even a vacuum cleaner can’t
do a good job in a garbage dump.
The first thing the government
needs to do is wake up and acknowledge there is a problem. Just saying that
there are external problems, when almost all of India’s problems are home
grown, is not enough. The external issues amplify the domestic imbalances but
government’s policies in recent years have significantly worsened those
imbalances.
There are many Band-Aid fixes that
can be done, but relevant long-lasting benefits require significant hikes in
fuel prices to cut subsidies, getting the fiscal and current account deficits
under control, improving the local investment climate, squeezing out inflation,
attracting foreign direct investment and moving forward with reforms.
Growth is going to be trapped
around the 6 percent mark and downside could still be there – it could clearly
be lower if nothing is done by the government.
There are no painless options. The
can has been kicked down the road so often and for so long, there will be
unpopular moves but they have to be undertaken.
Q: Is Wednesday’s steep petrol
price increase a sign the government has finally woken up and is ready to make
the reforms needed?
A: It is a start, but it only
shows a government trying to marginally make up the distance it has
fallen behind. It is still wedded to doing the least possible needed to avoid a
major systematic problem rather than being pragmatic enough to undertake
reforms so that India can do much better. It is merely doing enough for the
economy to survive, not thrive.
Q: What’s the next move the
government should make after the fuel price increase?
A: We have to see significant
increases in diesel and cooking gas prices. The prices of other things, like
electricity and coal, have to be closer to market-clearing levels.
The government needs to jump-start
investment and create a more enabling environment for growth.
What makes the Indian situation so
very unique is that it is not as if the problems are not known or the
solutions; it is the implementation that doesn’t happen because of political
myopia.
The current dual political
structure doesn’t work. It is ironic that the world’s largest democracy has a
selected, not popularly elected, prime minister. The people who do understand
economics don’t have the political strength to make decisions. Those who have
political power either don’t understand economics or are too fixated on
populism.
Q: What does a weak rupee actually
mean? If it doesn’t have a big impact on most Indian citizens, why should
politicians address it?
A: A weak rupee is a symptom of
the underlying problem, it is not the problem; it is the messenger rather than
the message. It is the outcome of chronically high inflation, policy
incoherence and self-inflicted injuries.
Consumer price inflation is over
10 percent, the rupee is in free fall, growth has been crippled and reforms
have become a figment of people’s imagination.
The rupee
has weakened more
since the end of July 2011 than it did during the 1991 devaluation. The
significant depreciation now will have a much smaller positive impact than in
1991 because it is not accompanied by a reform agenda. In 1991, the Indian
government didn’t have a choice; the International Monetary Fund forced it to
put in path-breaking reforms.
Q: What is our worst-case scenario?
How low could the rupee go?
A: We don’t know. No one can
really forecast currencies very accurately, in the near term and given global
uncertainty.
The rupee could easily fall
between 57 and 60 to the dollar depending on how the European Union situation
plays out. We just have to see what the government ends up doing.
Q: You must speak with government
and political advisers. Do you get the sense the central government appreciates
the necessity of doing something now?
A: There seems to be a disconnect.
The people who understand the gravity of the situation and know what needs to
be done don’t have the political capital to push through things. A lot of the
relevant people get it; one doesn’t need to be a whiz kid in economics to
appreciate what India is going through.
Q: You mentioned Sonia Gandhi
earlier – is she the major roadblock standing in the way of the economic
reforms that need to happen?
A: It is understandable that she
has a political agenda. But strong and well-balanced economic growth will offer
more, not less, opportunities for her well-intentioned redistributive agenda.
Not undertaking reforms that will boost growth needed to meet the rising
aspirations is a one-way path for the government to be out of a job.
I don’t think people are opposed
to helping the poor. But the popularity of handouts needs to change. Growth is
the best answer to poverty.
We require political will to do
something. The more the government waits, the stronger and more unpopular these
corrective measures will have to be.
