See India’s growth surpassing China’s by FY17: Rajeev Malik, CLSA

In a chat with ET Now, Rajeev Malik, Sr Economist, CLSA, talks about economic recovery and the possibility of India leaving China behind in growth by FY17. Excerpts:

ET Now: The rupee has touched a seven-month low at 61.53. This is despite what the RBI has done over the last six-odd months. What do you think is in store for the rupee in the near term?

Rajeev Malik: The real story, which everyone has overlooked, is that during this period while the rupee has weakened, RBI foreign reserves have actually risen. So, while the impact of the US dollar really started to come about more from July onwards, it does suggest that even prior to that the RBI wanted the rupee to weaken.

Of course, the RBI wants it to come about in a gradual manner without any destabilising price effect. But it does certainly tell you about the RBI’s own bias, at least in my opinion. Part of the game plan might be just to adjust the currency rather than let it go on hope and hype, and then have to deal with a much greater reversal altogether.

I still think that over the next 12 to 18 months, gradual depreciation is still very much going to be the play for the currency. I do not think it is going to upset the applecart as far as improvement of investor’s optimism on India is concerned.

ET Now: There was an interesting article from you stating that you see India’s growth surpassing China’s growth by 2016. How do you think that will happen?

Rajeev Malik: There is a need for some correction: I had said it would happen in FY17. There are two things at play here. One, of course, is that in China growth has to slow down structurally. We are already seeing some of the imbalances that they are dealing with.

Also, do not forget that China has already had its day in the sun. India, on the other hand, is coming out of what I have often labelled as an idiosyncratic slowdown, where policy actions or inactions were significantly more responsible for the growth debacle than monetary tightening per se.

As you begin to see a reversal in some of those things, then growth will begin to improve. India remains a terribly supply-constrained economy. So, it is not that demand is an issue. As you begin to adjust some of these things, growth will begin to come about.

I do want to emphasise that the peak of the cycle will still be lower than what we saw between, let us say, 2004 and 2008. But growth will be slightly above 7% and it could go higher, depending on what the reform agenda is and what is implemented. The growth is going to be of better quality with fewer imbalances and more sustainability.

Those aspects should not be ignored. My number is higher than your number in terms of growth forecast, but it overlooks some very important internal dynamics which will position India’s growth on a much more sustainable leg.

ET Now: I reckon you are still more bullish than bearish on India’s growth prospects over the next three-four years?

Rajeev Malik: There are only two views on India: a bullish view and a super-bullish view.

ET Now: The opinion is divided as to when the US interest rates start moving up. It is anybody’s guess. Anyway, I do want your opinion on what happens to the Indian bond markets and the currency when the first rumblings of a rate increase start coming on the street?

Rajeev Malik: The broader trajectory in terms of the rupee has been already delineated. We continue to expect gradual depreciation. It is going to be a palatable range. I would ignore any short-term temporary palpitations that might come across depending on what the global risk appetite ends up doing.

It is important to realise that India is far better prepared now. But at the end of the day, exchange rate is a relative price. If the dollar is going to strengthen, then US bond yields are going to rise. It is going to be payback time for all EM currencies. But India is clearly better prepared.

In terms of bond yields, there are two different or rather opposing forces at play — inflation and the fiscal setting and whether there will be any improvements. There will be pressure in terms of credit growth picking up, and therefore at some point banks will have to begin to offload some of those papers.

At the same time, international pressures will come across. So, I still continue to look for bond yields to be in a tight range. All the buzz about India imminently getting credit rating upgrade is not going to come to fruition. There is a lot of confusion in terms of a change in outlook versus an upgrade.

All three rating agencies are on par now — one notch above earlier positions. It is going to be there at least for the next 12 to 15 months.

ET Now: A lot of hope has been pinned on the new government in terms of what reforms one would see. What is it that you would like to see from this new government over the next six months? GST, diesel regulation, subsidiary reforms — are all of these in the pipeline?

Rajeev Malik: India is a reformers’ delight. Every few months people here bring out the list of reforms they would like to see. Big bang is not always possible in India. So, I would go by Raghuram Rajan’s report a few years ago.

Rajan talked of hundreds of small steps; and that is where part of the focus is really going to be. Fixing the fiscal front, getting manufacturing going — all these are going to be important.

The single most important thing is really about improving the ease of doing business. If this can be done, a lot of other things will begin to fall into place. My sense is that there is a healthy reset in terms of stratospheric expectations. I say it is healthy because there is a lot more realism or a reality check coming through.

The government will deliver, but it is ironic that in perhaps the most compelling and attractive long-term story in Asia, there is still uncertainty about how much better it is going to get.

So, India remains a good story. How quickly and how much of a great story it will turn out to be, is really in the hands of the government. And the jury is still out on that.