Transcript of a Conference Call on IndiaWednesday, February 6, 2013
Panelist: Laura Papi, Assistant Director, IMF
MS. BHATT: Good morning to all of you here and good evening to those of you in India or elsewhere in Asia. You all have seen the 2013 staff report on India as well as what we call the Public Information Notice, which contains the Executive Board's assessment. I have with me Laura Papi, who was the mission chief for India for the 2013 Article IV discussions. Unfortunately she has just moved to another department. I also have with me Jim Walsh and Rahul Anand who work on India in the Asia Pacific Department. Laura will make some brief comments and then we will take your questions.
MS. PAPI: Just a few comments for emphasis. You will have seen the report. Our outlook is for subdued growth and a fairly modest recovery for this year still accompanied by quite high inflation and elevated current account deficit. The reason for this subdued outlook is that investment has slowed significantly and we see some supply-side issues such as supply bottlenecks as having played an important part in lower investment growth and because of this we have also revised down our medium-term growth projections. We have emphasized that structural reforms are key to revive investment and especially to address the supply bottlenecks in power and mining (coal especially). Of course fiscal consolidation remains critical and we are quite encouraged by the fact that the finance minister has now announced a roadmap and has started taking several measures. The government has also taken several measures on the structural reform front, but sustained implementation is critical. I'll stop there and we'll take your questions.
QUESTION: I would like to ask you what is the reform that you think is essential to boost growth and how much do you think of this subdued growth is actually the fault of the external markets? Thank you.
MS. PAPI: In terms of the reforms, there is no one reform and no silver bullet. But the key reforms are to solve the problems in the power sector. And even there, it is not a matter of one measure, but is a matter of several different measures. For example, the government has announced its plan to restructure the debt of the power distribution companies. This is very important because at the moment these companies have financial difficulties, which lead to more outages. But this is not the end of it. This is one necessary reform and even for the distribution companies, efforts to reduce their losses and improve their operations are necessary. In addition, all the issues with fuel linkages, getting the power plants to have the necessary coal or other fuel that they're using again involves a series of reforms from for example the pricing of these resources, especially the pricing of coal, the logistics of getting the coal to the power plants, which can be problematic etc. There are also environmental issues which have also slowed coal production. Power we think is very critical because it affects so many other sectors, but there are other reforms that are important.
The whole approval process of investment projects has slowed significantly so that implementation times have increased. The government has now put in place a cabinet commitment on investment and we will need to see whether this manages to reduce implementation times and get several of these infrastructure projects off the ground and to be completed in a speedy way.
Beyond this, there are important legislative changes that are necessary. Land acquisition and the Goods and Services Tax (GST) in our view are the ones that are most likely to have a very important impact on growth. But all these reforms are going to take some time, so that's one reason why we see growth fairly subdued by Indian standards for the next few years. On the second part of your question on the impact of the external environment on India’s growth. Of course it's not easy to say how much is external and how much is domestic, but we have done some work on this. For example, the chart on page 5 of the report looks at trading partners' demand and how much India's demand dropped. What we noticed was that India's GDP growth dropped by more than could be explained by trading partners' demand. On the other hand, the financial channel, which was very powerful during the 2008 and 2009 global financial crisis, in the last couple of years has not been at work, in the sense that financing conditions have remained fairly favorable. Without saying exactly what the percentage is, we would say that domestic factors have dominated the slowdown.
QUESTION: I saw that you're recommending that the central bank keep the interest rate as it is because of the danger of inflation. Do you have a time horizon for this?
MS. PAPI: We don't have a time horizon. What we've said is that the inflation reduction should be sustained. While it is true that inflation pressures, looking at wholesale prices, have come down, including for core inflation, consumer price inflation (CPI) remains above 10 percent. And what we have noticed is that when you have consumer price inflation that remains elevated, partly due to food prices but not only, you see that the reduction in wholesale prices is not sustained and that's because CPI prices are much more important than wholesale prices in forming inflation expectations and also because food price inflation transfers into nonfood price inflation fairly quickly in a country like India.
For example, we have seen this in the fairly rapid growth of rural wages. We don't have a timeframe, but our sense is that this decline in wholesale price inflation may not be sustained.
QUESTION: When do you think India can return to 8 percent growth and secondly –on the role corruption in the growth slowdown--
MS. PAPI: In terms of 8 percent growth, we don't have the crystal ball, but an array of reforms are needed to get back to 8 percent growth including legislative moves. The land acquisition bill requires of course parliamentary approval, the GST requires even a constitutional amendment, etc. Changes to labor laws are even further out and less likely.
We think that to go back to 8 percent you need to see moves on a lot of fronts and investment picking up very robustly. It will depend very much on whether the government can deliver on all the reforms that they've committed to and sustain this reform momentum. You asked about whether corruption has had an impact.
It’s difficult to capture corruption and what it is, but what I can say is that it seems that it has had an impact on the speed of approvals of projects and this may not be all bad. More transparency requires more time and this is a good thing, but over time what we want to see is that there is also an acceleration in project approvals and also clarity in how policies are implemented.
QUESTION: If I can follow-up. You've got quite a few states that over the last few years have grown rapidly. How do you see the growth in those states?
MS. PAPI: I'm afraid we don't do projections state by state and we're aware that there are many important differences in the states, but we don't have specific projections.
QUESTION: Of late you have seen moves by India and Pakistan to improve bilateral trade -- will that have any impact on both India and Pakistan growth --
MS. PAPI: It would definitely have some positive effects. But not sufficient by itself to bring India back to 8 percent. Also some trade between India and Pakistan is probably at the moment intermediated by other countries. Of course to the extent that it becomes bilateral, the cost of trading will be reduced and will have a positive impact on growth, but it will not be all new trade. Overall definitely it is a positive move.
QUESTION: What you feel about capital inflows to India and capital outflows from India? Do you see that there is an influence of the policy in advanced countries to Indian inflation?
MS. PAPI: Capital inflows have strengthened in the last 6 months or so. We have noticed that they've responded to domestic developments. There has also been an increase in response to global liquidity conditions. But in the last year or so we have not seen in India capital inflows that are creating problems from a monetary policy perspective.
Indeed, the RBI has very seldom intervened by buying dollars in the last year or so. The few interventions that have taken place have been the other way around, selling dollars. So I would say that for the time being the monetary policy in advanced economies is not creating a capital inflow problem for India. You have also to recall that at the moment India has quite a large current account deficit so the pressure on the currency apart from the last few weeks has been on the weakening side, but it has recovered some ground in recent weeks.
MS. PAPI: Thank you for all your questions and if you have further clarifications, we are always happy to answer them—we are just an email away or through our Resident Representative in Delhi.