Lima: Implementation of the reform measures promised by the Narendra Modi government will be key to India becoming the second growth spot in Asia after China, said Changyong Rhee, director, Asia Pacific Department at International Monetary Fund. In an interview, Rhee, a former chief economist at the Asian Development Bank, also talked about on how the Indian central bank has more room to cut key policy rates but stressed the need for measures to anchor people’s expectations of high inflation.
Q: What are the downside risks that the Indian economy faces?
A: The corporate liabilities and leverages and some of the NPL (non-performing loans or bad debts) issues faced by banks are some of the risks. The NPL issues are manageable and are not a big downside risk. But in order to continue the growth momentum, you need infrastructure investment. But financing has to support this. This means that the banks’ balance sheets should improve to provide more liquidity. The capital adequacy of banks has to be adequately addressed. Addressing this corporate leverage issue, profitability of banks and issue of NPLs will be important to get to a high growth path.
Corporate restructuring, better ways of handling the distressed assets and a more transparent legal framework should be able to address this issue of NPL.
Q: The Indian government had announced a massive capitalization plan for state-run banks. Do you think that is not sufficient?
A: The implementation of this plan will be key.
Q: The world economic outlook also expressed concern about the slowdown in Indian exports. Do you think this will continue to weigh on India’s growth prospects?
A: This is a strong point as well as the weakness of the Indian economy. The Indian economy is a relatively closed economy and not linked to the global value chain. So the happenings in the global economy like what is happening in China has relatively a lesser impact on India. The magnitude of the impact of the exports slowdown on the Indian economy, which is very much domestic oriented, is relatively small. So in a downturn, it is a relative strength.
But on the other hand, if India wants to be a global economy, and improve its living standards, the integration of the Indian economy into the global value chain is important.
Q: To what extent do you think India will be able to benefit from the slowdown in the Chinese economy? The Indian government seems to believe that it is a big opportunity for India to attract more investors looking for alternative investment options.
A: Relatively speaking, it is true. Among the emerging economies, India is the bright spot. It can attract more foreign direct investment. On the other hand, if all other emerging economies and the global economy is slowing down, it is not good news. We really have high expectations. If India continues with its reforms, we are actually watching very closely whether India can be the second growth spot after China.
Q: What more does India need to do to support growth?
A: One word-implementation. You already have a good plan. India needs to stick to the plan and implement it as quickly as possible. The whole world is watching and waiting. You have introduced many new reforms to promote infrastructure. For instance, the land acquisition bill. You need to move quickly at the state level rather than discussing the issue. You have invited many foreign investors but because of many complex issues the actual investment is not growing fast.
Q: So do you think that the Indian government has not been able to live up to its promises?
A: I have very high expectations from the Modi government. Rather than doing all the reforms at the national level which may take long, he is looking to support any state which is willing to undertake the reforms. In a sense, he is encouraging competition across states. Emphasizing on implementation of a plan at a local level rather than a national level is a very practical approach. This may promote competition across regions.
Q: The Indian central bank reduced the policy rates by 50 basis points. Do you think there is more scope for monetary policy easing?
A: At this moment, it is the right decision. Because given the low inflation, real interest rates in India are higher than its peers. So there is room. But it really depends on two things—what is the future course of inflation and second people’s expectation. We believe many Indians still live in the past regime. They expect high inflation. They have to be convinced that inflation is anchored and low. They should not think that inflation is lower because of temporary aspects and will again increase. That may not be good. India should use this opportunity to change the people’s perception.
For this, the credibility of the central bank is very important. People should believe that the central bank is independent and will be able to shield them from very high inflation and the political pressure of facilitating credit expansion. The Indian central bank is now in a transition from the previous regime where it was more serving for the fiscal authorities and its role as a development bank. Indian central bank is moving towards a more modern central banking with inflation targeting.
(Author: Remya Nair is in Lima, Peru on the invitation of IMF as a part of its journalism fellowship programme.)