Ask Rashesh Shah, chairman, Edelweiss Group, to pinpoint what exactly is going wrong with the economy. And he doesn’t think twice before saying it’s nothing but lack of focus. The government, he explains, has been trying to defend the rupee, tackle inflation and push growth, all at the same time, thus losing its rhythm. Shah, in an interview with Mihir Bhatt, strongly pitches for growth, which he says can take care of all the ills on its own.
Is economy reached the bottom? Is the worst behind us?
I think whatever the sharp correction has happened in the equity market and in the currency is for the short term. It’s a sharp correction, but when it comes to the economy there are many macro-economic challenges, including a fast depreciation of the rupee. There is pain in the economy and there will be less growth because interest rates are high.
Given the liquidity crunch wherein we have high interest rates announced by the RBI, the effect is yet to unfold.
There will be an increase in inflation as the rupee depreciation will affect the interest rates. The pain has not yet gone, the asset quality of banks is under stress. And this will not end until the next two to three quarters.
Is this crisis of our own making? Did the government lose its track?
Partly, the reason behind the current situation is because we have tried to do everything. We have tried to defend the rupee, focusing on inflation and growth. The government should have a clear objective. I think the fight that we have put up over the rupee by tightening the liquidity was futile, its added cost is high.
It didn’t have any advantage and has also affected the economic growth. Initially, we said inflation is the problem and we have to bring it down, then we focused on growth and said we need to cut interest rates, suddenly defending the rupee became important, which created a lot of confusion in the market.
Out of all these three, growth is important because if there is proper growth, we can handle high inflation. Even if the rupee is undervalued, it is not that disastrous. Every country wants that their currency is slightly undervalued so that their exports have competitiveness and their imports are substituted. So, if the rupee is undervalued, it’s not as disastrous on the economy as high interest rates or liquidity tightening due to which the expected growth is 4- 4.5%.
Where is the problem with the government?
The 2008-09 global crisis had affected the Indian economy a lot, but we were able to come out of it intact. In 2010-11, some policy decisions were taken, maybe they were taken out of overconfidence that our economy is good and our economy wasn’t affected by the global crisis.
So, foreign investors will keep coming to India, the attitude that they need us more than we need them is one if the reasons why we are paying this price now. When Chidambaram was appointed as the finance minister, he tried to handle many things sole-handedly. In the past few months, the government has taken many good decisions like opening up the diesel prices and retail FDI, but all this is less to contribute to the economy and also confusing. We need to do more, and even the global situation has affected us more.
Can we afford the Food Security Bill?
While we were expecting that our economy will grow by 5-5.6%, the RBI had started cutting the interest rates. If this had been the environment now, investors wouldn’t have had any problems with the Food Security Bill. It has come at a wrong time in a current stressful environment, which has had a psychological impact, but it is not that big an issue. The main issues are high interest rates, tight liquidity and less growth.
Wil the spike in crude prices due to the Syria crisis will weigh on markets?
The rupee which is at a low is a problem as well as an opportunity because exports will become competitive now and it will also lead to import substitution. In the last five years, not just high technology, but low tech things were on the import route. We have to start manufacturing things we import like even the rakhis, buckets, furniture which can be manufactured in the country. I don’t think it is the end of the world looking at the low in the rupee.
If the same government is chosen for the third term, will it be negative for the economy?
In this environment, whatever the government does, politics and economics are different poles. To stay in power, whatever measures they bring for inclusive growth, we will have to put up with it. We need to boost our growth for which there is a need to cut interest rates and ease liquidity.
Is there more pain in the market?
This crisis is not just of India, but of all emerging markets because there is reallocation of global investors, outflows bond funds and equity funds, so there will be stress.
Fundamental improvement is around two to three quarters away, so it is of no use for investors to have expectations from the market. I recommend investors to focus on capital safety, where there is liquidity so that they can capitalise when there is an opportunity. Liquidity, capital production and capital safety are very important now. This world will be very volatile for the next 2-3 quarters, so investors should take advantage of it.
Was India story taken for granted?
We can come out of it for which we need to take some policy decisions, many problems of India can be solved. For instance, we import coal while we already have coal reserves and still we are importing it, the iron ore exports have gone down due to the ban in mining. If that is reversed, there will be a boom in iron ore exports which can help revive the rupee. If we come up with gold schemes, it will reduce imports as we can recycle the existing gold in the country.
Courtesy: Zee Business