‘Slight cyclical slump in the works’

Rajeev Malik, executive director and senior economist at JP Morgan, feels the India growth story is largely intact. Policymaking, though, is a point of lament. Ideally, one should start with what should be done and filter down to what can be done. But in India, what should be done, what can be done, what’s said will be done and what actually gets done, are all very different, he told Sanat Vallikappen, Vivek Kaul and N Sundaresha Subramanian in a free-wheeling chat. Excerpts:

Is such high growth sustainable?

In a nutshell, we do think a slight cyclical slowdown is already in the works. I would emphasise the word ‘slight’. We expect the growth this year to be 8.6%, slower than 9.4% last year.

Further moderation will continue into the next year to around 7.5%. This moderation is not necessarily a bad thing, especially coming at a time when there are a variety of supply constraints and the fears of inflation.

This could exactly be what the doctor ordered.

Has inflation ceased to be a concern?

I wouldn’t say we are not concerned about inflation. We think the headline WPI is below the RBI comfort levels.

We will see the touch of headline numbers creeping above the limit end of the year or early next year. But again, the emphasis is on the numbers remaining below the RBI comfort levels.

What are the key concerns?

Two main areas of concern are international crude oil prices and food price inflation. Our sense is, given the state elections in Gujarat coming up, any room for a hike in local fuel prices is highly unlikely.

Monetary policy, we haven’t seen RBI doing anything since March. What happens with CRR is going to be critical. Anyone who is trying to tell you when the next hike will be is either lying or smoking something he or she shouldn’t be.

Reason is, it’s very much a function of flows. That’s something that can shift within a week’s time or a two weeks’ time.

The flows have gone from being a blessing to a curse?

Today, we have reached a difficult phase. The economy is really not prepared to absorb the quantum of money coming in. The reason it’s not ready is because policymakers have not really done much.

I continue to be amazed why there was no onshore questioning on what the government has done in the last 2-3 years to increase the absorptive capacity of the economy.

It is one thing to attract more capital, but whether you can employ it productively is a totally different question.

How does the road ahead look?

Realisation is dawning... Finally, now rupee dynamics has taken significant political dimension. Anything that has a political dimension obviously gets regarded in growth. However, only so many options are available.

If you think through, India tried MSS, CRR hikes and encouraged outflows. But still, direct inflows continue to be a problem.

It’s only now that, over the past three months, we have seen moves to allow selective kinds of capital have materialised. I think we haven’t heard the last on that.

But moves on these are going to be somewhat incremental and gradual. Lot of policymakers would have been encouraged by the fact that both ECB and PN restriction haven’t really dented (the flow).

Oil prices are artificially held up. Are the inflation figures realistic then?

But, it has been so last year and year before that as well. Your point is well-made to the extent that at some point the pass-through has to happen. What we are trying to emphasise is that somebody has to bear the cost.

There are three players: the government, the oil companies and the consumer. It’s going to be disproportionately felt by the oil companies. The consumer is going to be the least affected.

There is no other reason than that for political compulsion.

In the US, January and February would see a lot of mortgage resets. Do you see serious fallouts for Indian markets?

It will be very much a function of how unexpected it is and how the markets react. There I would differentiate between the broader structural story in India that has attracted funds versus the market gyrations or volatility.

I can’t tell you what inflows in January would be. Is it a risk? Yes. How that risk gets transmitted?

Either through financial markets or economic channel. India’s case, the flows are predominantly on the equities side and through the P-note route, which has been taken care of.

To the extent you may see a reversal of capital may not necessarily be a bad thing from RBI’s monetary management perspective.

But, that remains wishful thinking now. The other part is flows that get attracted by the structural story. I think it can only get better.

How feasible is a free-floating rupee?

There is ongoing discussion about letting the rupee go and turning it into a float. It sounds very sexy, but somehow practically untenable.

The only way to deal with further rupee appreciation over next several years is further reforms that increase the absorptive capacity, lower inflation, which then essentially increases the speed of non-inflationary growth.

Everyone’s caught off guard by the pick-up in growth and the related flows. Just think about it. If RBI had not been resisting all the calls to let the rupee go and throwing the capital account open, we would be in much bigger problem today.

You don’t solve a problem by making it worse.