'India Can Translate Optimism Into Real Growth': Chetan Ahya, Morgan Stanley

Image: Joshua Navalkar

Led to power by a categorical mandate, the new Bharatiya Janata Party government has triggered hope for reforms. This has started to clear the clouds of doom that India faced until recently—more specifically, a stagflation-type environment since 2009. But Chetan Ahya, Morgan Stanley’s managing director and chief Asia economist, is confident that India could soon witness the easing of high food inflation and a pick-up in growth—the country’s biggest economic bugbears. Ahya’s faith stems from the fact that as deficit levels come down, rural wages will start to ease and government spending is likely to get contained, which, in turn, will help reduce inflation. Excerpts: 
 
Q. Did you anticipate the euphoria surrounding BJP’s return to power?
We had not expected the single largest party to get what the BJP has got. To that extent, it is a surprise. Therefore, we have upgraded our numbers. We have revised India’s GDP growth for the year ending March 2016 to 6.5 percent from 6.2 percent. Assuming the government delivers what we are looking for, we could even transition to 7-7.5 percent for the financial year ending 2017. If India is able to give a 6-7 percent GDP growth rate in two years with 6 percent inflation in the backdrop, it will effectively become the highest growth country in the world. China is growing at 7.5 percent today, but it is achieving this with excesses, like India was doing in 2010-11. China’s high growth rates are accompanied by unsustainable growth dynamics, where its debt-to-GDP [ratio] is constantly rising.

Q. What does the Narendra Modi-led government need to do to set things right?
It should take every step to move towards constant deceleration in inflation and acceleration in GDP growth. To some extent, some of the measures will address both: If you bring down inflation, interest rates will be more stable and manageable. We are basing improved growth on a two-stage recovery: First, growth will be led by a recovery in exports. They are -1 percent in dollar terms in the March 2014 quarter; this could rise to 10 percent by March 2015. This will be due to global demand improving in the United States and Europe. The second source of recovery is from the confidence of a stable government coming in.

Q. You have spoken about ‘The Next India’ where economic fortunes are starting to turn around...
India is gradually moving out of a stagflation type of environment. We forecast inflation to go from 8.6 percent right now to 6 percent by March 2016, and real GDP growth from 4.6 percent in the last quarter to 6.8 percent by March 2016. This level, which we could get to for the first time in eight years, will be close to RBI’s comfort zone of 5-6 percent.

Q. Will this be led by food inflation tapering off?
Yes. But the critical component to high food inflation is rural wages and government spending. Both worked against overall inflationary environment including food. Seventy percent of India’s workforce is rural and their wages have been growing at 18 percent for the past five years. Wages are 50 percent of food production cost and food is 47 percent of consumer price inflation index. This is how we’ve had the viciousness of higher wages to inflation. Government spending is the other factor impacting inflation. Between April 2013 to February 2014, government spending growth was 15 percent. This is higher than nominal GDP and therefore it is in some cases, inflationary. 

Q. Though early, the Modi government is starting to make the right noises…
From a macro perspective, whatever noise they have made post-election has been constructive. There are no quick-fix solutions. We need to fix what has gone wrong and what was possible to do, rather than doing something complex and more difficult. In the previous decade, we were focussed on building productivity and boosting infrastructure spending. When growth took off in 2004-05, we had questions about the private sector and non-transparency. But we did not have an inflation or fiscal deficit problem. Economically it was sustainable, but when we started infrastructure spending in a big way four years ago, it called on critical national resources—land, minerals, airwaves, oilfields. These were allocated to the private sector in a way that was seemingly not transparent. Now we are fixing the transparency issue; we are taking care of those institutional set-ups to ensure minimisation of corruption.

Q. Will we face similar problems once growth picks up again?
We may not grow above 7 percent because these systems will take a long time to build. I’m assuming we will not jump and go to 9 percent growth levels. The opportunities will be there for the government to run faster without putting in right systems, but after seeing what the country has gone through, it will not be ignored.

Q. Are you worried about stock valuations getting stretched, amid record highs?
These are expectations and can go in extremes. But I think India can deliver attractive asset market returns. Age dependencies are rising in six of the nine Asian countries we cover including China, Hong Kong, Taiwan, Korea, Thailand and Singapore. They have a problem of high debt-to-GDP [ratio]. It is in this context that we think India provides a relatively attractive investment opportunity. 

Q. Is RBI governor Raghuram Rajan taking the right steps?
It is a good sign that there was no interference from the government for him to cut rates—this is what he had implied in his April policy stance. It is proof of the fact that he has been able to interact with the policymakers and explain his predicament. We believe the government will ensure that the RBI operates [in a way] that helps contain inflation.