Gold Silver Reports — China Slump Makes India More Attractive for Foreign Inflows — India is currently in a genuine sweet spot and could easily benefit from the slowdown in China, says Richard Iley, chief economist emerging markets (EM) at BNP Paribas. “The global perspective about the country is very positive and it won’t be wrong to say that India is a shining light in emerging markets,“ Iley told Rajat Arora in an interview. Edited excerpts:
How does the India growth story look compared to other emerging markets?
I think the outlook for India is the brightest I can remember since I have been tracking the economy for more than eight years. It stands out as generating the fastest GDP growth among emerging markets. There’s certainly a question mark on the real GDP numbers but I think the nominal GDP numbers give a more credible picture. Even going by the nominal GDP numbers, which now show double-digit growth, India is comfortably generating the best growth in emerging markets. The global perspective on India is, similarly, positive and it is no exaggeration that India is a shining light in the global economy. FDI (foreign direct investment) and FII (foreign institutional investor) inflows have been very strong.Along with this, if the country is able to deliver game-changing social reforms that would be icing on the cake.
What are the factors supporting India’s growth?
India is in a genuine sweet spot given that international fuel prices are still low, supported by low global interest rates. This allows the government to keep its capex high as the gains from fuel prices are diverted towards public spending. What will sustain (and) even accelerate GDP growth further is domestic consumption. Given that India has had a good enough monsoon to push up rural growth after several years of drought, rural demand looks set to revive. The potential growth for India as per IMF (International Monetary Fund) is around 7.5%. But I hope India could do better to be slightly above 8%. The GST (goods and services tax) could contribute to it as well. Today, the FDI in India is around 2% of its GDP (gross domestic product), whereas China, for a long time, managed to attract FDI of 3-4% of its GDP. I think India should aim to replicate China.India has the potential to get around $100 billion in GDP. In two years, FDI has increased from $25 billion to $40 billion. I’m sure India has scope to do even better. The slowdown in China also makes India a more attractive destination for foreign inflows.
What do you think about the growth agenda undertaken by the government?
A lot of the big reforms have already been undertaken by the government. The insurance bill, the arbitration act, GST, the bankruptcy code and liberalisation of FDI norms in certain sectors have already been done. The challenge for the government now is primarily execution: get GST up and running. That would be a game changer. As GST beds down, we should see more competitive federalism as states compete for investments. Those that improve the ease of doing business and labour reforms will see the fastest growth and biggest inflows of capital.Private investment along with the increased government spending would help India achieve even faster growth. For now, private investment is still languishing. It’s the economy’s real weak spot. Capacity utilisation remains unusually low in key sectors and the banks are grappling with NPAs, slowing down lending. I think it would take at least six quarters before we would be able to see any improvement.
How do you see the benefits of GST rolling out?
A number of positives will flow from GST. I hope that the government is able to get it implemented by the middle of the next financial year if not by April 1, 2017. The GST should reduce the travel time of road freight and eventually pull costs down. GST should also accelerate the widening of the tax base and so boost fiscal revenues. It would make India more federally competitive. We would actually see states competing for investments. — Neal Bhai Reports