New York Times (May 24, 2012)
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May 24, 2012, 5:59 am
India’s Faltering Economy Could Get Worse
By HEATHER TIMMONS
Adnan Abidi/Reuters
People walk past a roadside currency exchange vendor in New Delhi, May
22, 2012.
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 his bearishness may not have been
misplaced. In November of 2011 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 Thursday afternoon, the
rupee was trading dangerously close, at 56.2 to the dollar. In December
of 2011, he cut India’s economic growth forecast for the fiscal year
that began April 1, 2012 to 6.3 percent, a forecast that has just
recently been echoed by other economists.
Courtesy of CLSA Asia-Pacific Markets
Rajeev 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
Congress Party President Sonia Gandhi 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 Congress
President 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 hike 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
hike?
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 hand-outs 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.
This interview has been lightly condensed and edited
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