CEA Anantha Nageswaran: ‘It’s a story of the dollar’s strength. It’s not a story of the rupee’s weakness’

On the Ukraine-Russia conflict and its fallout

In 2022, we thought we would finally put the Covid-19 pandemic behind us and look forward to a year of recovery and growth. A month after the Omicron wave passed in a relatively muted manner, we had the budget. Then the conflict in Europe erupted, which led to a breakout of commodity prices, which in turn led to synchronised interest rate increases by central banks around the world, including India. Just as we thought there are some ‘benefits’ to the economic slowdown, such as lower commodity prices, we had the production cut by OPEC (Organization of the Petroleum Exporting Countries). There are still lingering uncertainties depending on which way the Ukraine-Russia conflict goes. There could be potential for extreme reactions from some sides. Then what would happen to the oil prices; whether the intended oil price cap works out the way it is intended or goes in a different direction? Under the circumstances, India enjoys relative macroeconomic stability and prospects for growth.

On the rupee’s performance

We are talking about a bilateral exchange rate of just one pair. If you look at the rupee’s performance in the course of the current year, it is one of the better ones. I’m not just speaking about emerging economies, but including advanced currencies, such as the euro, pound, yen and the Korean won, etc. I think the rupee has done far better against the US dollar. Given that the currencies of other countries have depreciated against the dollar even more than the rupee means that against these currencies the Indian rupee has done much better. There it is not at its historical low. We need to keep these kind of headlines in perspective. When the US raises interest rates, when investors around the world become cautious and when flows of capital get affected, the dollar tends to appreciate. This year, since the conflict broke out, it’s a story of the dollar’s strength. It’s not a story of the rupee’s weakness.

On the effect of inflation and rising interest rates

If inflation rises, it does eat into the purchasing power. Rising interest rates lead to lower spending but they also raise income for savers and depositors. Until interest rates went up, we were complaining that real rates of return for savers were negative. Now real rates of return on deposits will increase. This inflation is hurting almost all countries around the world. Our growth forecasts, which were at 9 per cent or so at the beginning of the year, have come down to 6.5 per cent.

The best case scenario, given the state of the world, would be for India to be able to achieve a real growth rate which has a seven (per cent) handle in front of it. If I look at some of the so-called high-frequency indicators, like footfalls in restaurants, air travel, railway fleet etc, some of those indicators have held up far better than expected. One or two areas which were lagging behind, such as contact services like hotels, restaurants etc, have improved, although they have not gone back to the pre-pandemic levels. Two aspects of the various high-frequency indicators that are still below the pre-pandemic levels are international tourist arrivals and domestic travel. Everything else has gone past the pre-pandemic levels.

On fears of domestic consumption slowing

As a large country with a large domestic population, in India, when compared to East Asian countries, domestic consumption has been an important component of economic growth. Post-pandemic recovery is beginning to happen. If you look at the surveys that the RBI puts out before every monetary policy meeting and track that over the course of 2021 and 2022, the direction of change has been positive. Consumers are becoming less pessimistic about their income prospects, employment prospects and spending intentions on durables or big-ticket items.

Corporates are being more careful compared to what we expected. In the absence of the conflict in Europe and rise in commodity prices, it would have been much better. The reality is shaping up to be lower than what we expected from corporates, which is also reflected in the overall GDP growth.

On demonestisation and GST impacting the ‘missing middle’ — medium-sized producers and consumers

Demonetisation happened about six years ago and it would have had a short-term impact. GST may be flawed but I think we are not talking about the reality in comparison to an ideal but the reality in comparison to what preceded that. If in comparison to what we have now was a plethora of 480-odd tax rates, and now there are 40-odd tax rates, it might look unappealing to you against your ideal of having three or four, or maybe two rates. But the fact is we have come down from 480 to 40. We need to appreciate that incrementally the systems and the policies are moving in the right direction.

As far as the missing middle is concerned, it is work in progress. These things take a long time to play out, but GST is actually helping in the formalisation of the economy in terms of many small businesses. For example, in the data on the number of businesses that a platform like Flipkart or Amazon onboards and the number of MSME enterprises that Paytm extended credit to, the numbers are picking up very rapidly in terms of small and medium enterprises, micro and small enterprises. The process of filling the “missing middle” in India is unfolding. Digital infrastructure and the evolution of GST have aided that process rather than impeded it.

On the NREGA numbers and FMCG spending in rural areas

The total number of NREGA beneficiaries could be 4.4 crore but we also looked at the breakdown. Lately, NREGA claims for households are improving their own land holdings. That has gone up from a small portion of the overall NREGA payments to nearly one third, which means people are using this as a means of improving their asset base. I might even consider that not as an unemployment subsidy but more as a capital formation subsidy. The number of claims as well as the value of the claims related to owned land improvement has picked up tremendously in the last eight years.

With respect to FMCG, recent data says that two-wheeler and four-wheeler sales are beginning to pick up and tractor sales have done well. They had retrenched in the last one or two months but they had a great comeback in 2021-22. Some of the improvements will be relatively slow because people will adjust depending on the evolution of energy prices or input costs. We have to accept that some progress will be uneven and slower than what we expect but it is moving northwards.

On the need for reforms

Whenever there is feedback or an experience that necessitates the need for certain tweaks, these tweaks have happened, either in the Insolvency and Bankruptcy Code (IBC) or the GST. We can always continue to work on making many of our processes simpler. Have one-stop single-window clearances, especially for some small, micro and small and medium enterprises. If the central and local governments reduce the compliance burden they face, they will definitely relieve the constraints that they face, both in terms of financial and human resources. In the last two years, despite the pandemic, the government has announced a roadmap for privatisation. The issue is not just with the government’s intent but we must remember there are so many stakeholders who feel that they would lose out in the privatisation process. Given the systems we have, they find many ways to create hurdles in the process.

Sometimes what even people outside the government champion as contributions to better governance, such as so-called Right to Information, which, I also personally think is in principle a great thing, can sometimes stymie decision-making processes and discussions. Therefore, not just the government, even people outside, who have public interests at heart, must remember two things — there is always the law of unintended consequences and the road to hell being paved with good intentions.

On Foreign Institutional Investors (FIIs)

If risk aversion persists for much longer, it will definitely affect cross-border capital movement and capital flows. As a country that runs a current account deficit, naturally, we look for external capital. FDI and FII flows are two components but there are other components as well, such as bilateral credit, excellent commercial borrowings. Those also meet our current account funding requirements. At the moment, we have a reserve cover that takes care of eight to nine months of inputs. It depends on how commodity prices evolve. In the last two to three months, they have dropped quite materially but recently oil prices have firmed up a little. We have to be watchful.

On excessive note printing in the US and Europe

In 2019, I co-authored a book called The Rise Of Finance: Causes Consequences And Cure, that tells you some aspects of the way policy evolved in the West post-2008, or even dating back to the 2001 recession. They have evolved in a manner that for every solution, throwing more money or lowering interest rates became the only answer. In 2020, post-pandemic, there was a joint stimulus, both fiscal support and monetary policy support, and they were kind of open-ended. Now, we are facing the consequence of having to pull them back. It is difficult to pull it back without causing pain. To a large extent, viewing every economic slowdown as a case of deficient demand — requiring a textbook monetary policy or fiscal stimulus in the last 20 years — is one of the reasons we are facing such extreme uncertainty and the prospect of dislocation in the global economy.

On an alternative to the dollar

The dollar still remains an important vehicle for financial markets or trade transactions. Foreign exchange reserves themselves have become subject to sanctions or instruments of international power relations, which naturally encourages many countries to look at barter arrangements or to trade in settlements other than the dollar. That process is a natural reaction to weaponisation of currencies or foreign exchange reserves but it is still very early days to talk about that.

We have just become the world’s fifth-largest economy, and should grow further along those lines. It is a logical step to look at ways to internationalise the Indian rupee and it will happen… Whenever the US raises interest rates, there is this global dollar shortage that emerges. It’s not just the sanctions that are causing this discussion to happen but also episodes of dollar shortage, as in 2008 or now, that are making people think about this as a practical necessity.

On China’s shrinking role in global trade

There is going to be a need for a lot of adjustment because China was the manufacturing centre for the world for many goods. It was “the factory of the world”, and that is changing. As China becomes a middle-income country, its wages rise and productivity slows down and therefore it cannot be supplying goods at the same lower prices that it used to. That’s one factor. Also, without going into the geopolitical tensions or trade disputes, the pandemic itself, under lockdowns, made people realise that you can’t always have just-in-time-production but you also need to think about just-in-case-production. Certain amount of resilience and slack have come into business decisions and that would naturally mean higher cost and higher prices. But these are all things that will play out in the next 10-20 years.

On the Centre taking more control over state budget

I don’t think the Centre is taking more control. If anything, the bulk of the expenditure happens in the states. Whether the headroom is there, for borrowing or not, depends on the state. In general, the rule is that states in a normal year do not breach a three per cent deficit and the extra room was given during the pandemic years for them to borrow. States also have 25 or 30 per cent GSDP (Gross State Domestic Product), as their debt to GSDP level to watch out for.

In general, debt sustainability issue for India is not an issue of concern because your nominal GDP growth of about 10 percent is well above the cost of borrowing. We should see our debt trajectory improve over the years.

On lack of data

Of course, it is a constraint. The periodic labour force survey, lag between the time for which it reports data and the time it is released has been shrinking, but there is still room for improvement. Because of the pandemic, surveys could not be easily conducted during the last two years. I’m told MoSPI (Ministry of Statistics and Programme Implementation) has launched many surveys that need to be updated. Whether it is labour force or capital formation, both of these are important components of GDP, employment and investment. We need more timely data and now, given the spread of digital technology, it should be possible to conduct them with greater regularity.

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VOICE BANK

Sanjiv Mehta
CEO & MD, Hindustan Unilever

On FMCG consumption

At the national level, per capita consumption is about $45. It’s significantly less than even developing nations. Indonesia is 2x, China has 3x and the Philippines is 4x the per capita. Within this, rural is one third of urban. Right now, there is headline growth, it hasn’t met single digits. The volume growth is in the negative mid-single digits. The price increase, which is about 10-12 per cent, is taking a toll on consumption. But when it takes a toll on consumption from a very small base, people cut back on even daily essentials. That’s the picture as far as rural is concerned. This is average but rural is a bit worse when you look at volumes.

Teena Sharma
Board Member, Ministry Of Micro, Small & Medium Enterprises

How will the government deal with state governments that are not taking Ayushman Bharat? Without census and data, how will you deal with pharma in the unorganised sector?

I don’t have any comments on how the government plans to deal with state governments that are not part of Ayushman Bharat. I agree with you that a census is needed. You need data and need to conduct these surveys periodically.

Ranen Banerjee
Partner, PwC India

What is the government doing to boost the services side of the economy?

The government has been liberalising FDI rules with respect to banking, insurance and different sectors, so a package such as PLI or Atmanirbhar Bharat was needed because the manufacturing share of GDP was low. The services sector has demonstrated impressive growth, so it didn’t require a policy package. We can think of elements for services growth in employment generating sectors such as tourism.

VN Dalmia
Director & Former Chairman, Dalmia Continental

Will items such as petroleum and liquor be brought under GST? Wouldn’t it help inflation to lower protection rates of agricultural commodities such as edible oil and pulses?

I agree with you on the desirability to include fuel products in GST, but that decision has to be taken by the GST council. We are not increasing import duties on edible oil. We are trying to address the inverted duty structure, raising duties on finished products. It’s a dynamic process to give incentive for domestic production and ensuring imported goods don’t become more expensive.

Kirit Parikh
Chairman, IRADe

Much inflation is due to the increase in international oil and domestic food prices. Why raise the interest rates?

The RBI does not raise interest rates in response to the first round of inflation shock from international prices, but responds when it spills over across commodities. When the US raises interest rates and the dollar strengthens, if you don’t raise interest rates, it will impact your currency and lead to inflation via higher import prices. Third, when banks lend more, you need deposit rates to rise in tandem, or there will be a problem of not finding the right amount of resources to lend.

Rashmi Saluja
Executive ChairpersoN, Religare Enterprises

On the Health Sector

Though I run a financial services company, I’m myself a public health person and I have to compliment the way the government has been doing a lot in the health insurance sector, and that is really going to bridge the gap between the investment that India is going to do and penetration in the health services. Ayushman Bharat and how the IRDA is raising awareness is absolutely great.

Kawazu Kunihiko
Charge d’AffairEs, Embassy of Japan

What are your views on FTAs (Free Trade Agreement)?

India is not averse to FTA, and we have signed two this year, with UAE and Australia. Conceptually, once a country enters into a FTA, it will see more imports. The devil will be in the details, the kind of products you attract, the duty concessions are on finished products or on intermediate or raw materials.

Leher Sethi
Founder, Something Creative

You mentioned that the Right to Information Act is hindering the work the government is doing.

I didn’t say it is undesirable. In fact, it is necessary for accountability. But in many countries the process of deliberations is not subject to RTI…
It can lead to unintended consequences for people opting for safety of decision-making rather than taking necessary risks.

Navin Raheja
CMD, Raheja Group

For the real estate industry, there is need for a single-window clearance mechanism. Second, the government can partner with the underemployed and unemployed to create a production hub of the world.

Your first point is about time-bound single window… you can share these suggestions during the pre-budget consultations. Second is a worthwhile suggestion and I will share it with the relevant people.

Ajay Gudavarthy
Associate Professor, JNU

Do you think the present regime’s economic policy is pushing economic inequalities?

Absolute incomes are rising but relative incomes are widening. In the last decade, the financial system was undergoing stress and the corporate sector was repairing its balance sheet. Then the pandemic happened, followed by the conflict and tightening interest rates. Also, people do not take into account the inequality pre and post taxes.

Ananya Awasthi
Director, Anuvaad Solutions

What is the long-term strategy for public health investment?

The government is committed to increasing health expenditure to 2.5 per cent of the GDP. The Jan Ayushman scheme is also expanding its coverage, so that secondary and tertiary care is available. But it is a balancing act and we need to keep in mind the competing considerations on the budget.