Taimur Baig oversees global research at DBS Bank as Chief Economist and Managing Director. He tracks the G-3 and G-8 and their economies closely while also keeping an eye on regional economies. During a recent visit to India, he took some time out to explain his views on some of the recent developments, and his outlook for the region. Edited excerpts:
What’s your outlook on India?
Let me describe India, juxtaposing it with what is happening in China. In China, we are seeing a steady decline in domestic demand, but given that global growth cycle is still strong and external demand is doing very well, China has been managing to grow at 6 per cent during the last few quarters. That seems likely to continue. India is at the opposite end.
External demand has been lacklustre while exports’ contribution has been negligible. But domestic demand is firming up after a couple of quarters. So, China is characterised by deleveraging and weak credit growth, while India also has deleveraging but credit growth is picking up.
We have a real-time framework to assess growth dynamic in India, and we can measure it all the way up to June-end, which shows us in the mid- to low-7 per cent growth in this quarter as well. We have nothing in the pipeline to suggest a slowdown. In the world we live in, 7 per cent growth is very, very impressive.
When GST was still in the pipeline, experts had said it would add another 2 to 2.5 per cent to the GDP. So, are we then on the threshold of a 10 per cent GDP?
No. I used to work on tax administration in the IMF and studied the sales tax administration in many countries. I can assure you that no study shows GDP growth rate goes up by 100 to 200 basis points just by tax-policy change.
The genesis of that belief was in the original Vijay Kelkar report. They wanted to show an upside to GST. They used a macro model where they said that this is almost like a terms of trade gain for India, where the efficiency gains would mean lower prices, and that was projected on a macro model for overall growth outlook. But you cannot take that as a guarantee of economic gains from tax reform. What we have seen in the last one year is the first step in a very complicated process of making India a common market. We are not there yet. We are nowhere close. States have the powers to impose their own surcharges. Inter-State commerce has become easier but not seamless. We are getting there. Implementation of IT is a pre-requisite for a good GST regime. It is still a work-in-progress. We will see eventual upside. Even if we get 25 bps gain, that is good. But nobody should live under the impression that somehow growth will come automatically.
Although it is still in the early days, the first two months of GST collections seem to be on target. Does that point to a revival?
We have seen normal GDP growth picking up. For a few years we had exceptional GDP growth and low inflation. Taken together, we had barely 10 per cent normal GDP growth rate. Going forward, we will have 4 to 5 per cent inflation and 7 per cent real growth; so, normal growth will be around 12-13 per cent per cent.
The challenge for GST is to grow faster. The tax-GDP ratio increase would entail tax buoyancy. So, the tax has to grow faster than GDP growth. The way to judge the success of GST is – are we seeing faster growth in GST than in GDP growth?
Are you optimistic about the next one year?
The economy has benefited considerably from public investment. Given the fiscal situation, I don’t think we should expect much more support from public investment. But I am seeing some tentative signs of private investment picking up after a long time.
When you see headlines about all the troubles in public sector banks – it is easy to be pessimistic about the investment cycle – but we need to go beyond that. We have to see what private banks and NBFCs are doing.
In 2017-18, a majority of the credit generated came from the bond marketplace, private banks and NBFCs. I expect that dynamic to persist. It is unique because banks generally dominate intermediation, but it is encouraging that there are other components from which credit is being generated.
Can bond markets feed the increased demand? They provided ₹6 lakh crore last year and ECBs another ₹2 lakh crore when credit demand was weak. But now interest rates are also rising?
Yes, the cost of borrowing is going up worldwide. Corporate India has to be ready for that. I go back to the point when the country is growing at 7 to 7.5 per cent and inflation at 5 per cent, which means just a baseline of 12 to 13 per cent growth, then companies borrowing at 10 to 12 per cent is still doable.
A decade ago, when normal GDP growth was 16- 17 per cent, Indian companies had no difficulty borrowing at high rates of 13 to 14 per cent. Then, of course, things took a turn for the worse. But we are not talking about such high growth rates or such high interest rates like in the past.
We are talking about much lower growth and lower costs. Under that environment, I do think corporations can absorb the higher interest costs. It is not an easy situation. It is challenging for everybody. But it is good to come into this challenging situation with a sound domestic demand when we can express confidence on macro management.