Policy transmission is a key challenge: Shaun Roache, S&P
"India has the potential to grow much faster but that needs a sequenced and powerful reforms agenda."
We have just had a cut in lending rates by the RBI. But there’s a debate about market transmitting it to consumer. How do you see this?
Transmission of monetary policy to the real economy is a challenge in India and we need to be realistic about the impact on growth from rate cuts. That’s why if you want supercharged growth, you need to think much more about structural reforms than simply thinking about cyclical demand management. It can go only so far. It will help but it’s not really going to be a game changer in the medium term.
What is required to push growth?
India has the potential to grow much faster but that needs a well thought out, sequenced and powerful reforms agenda. China did that in the 1990s. India needs its own set of bold reforms to follow China’s development path. India should be trying to raise investment in productive assets, which requires lifting the marginal return on capital to make it more attractive for the people that are investing.
How do you do that?
To do that, three key reforms should be on top of the list. First, land reforms, which will make it easier to develop infrastructure and lower the cost of doing businesses. Second, labour reforms to make it easier and cheaper for firms to hire workers and that will also make it more attractive for firms to invest. Third, clean up the banking system to create more space on balance sheets for productive lending to faster growing sectors.
What can push private investments?
Structural reforms is the key. It’s going to be difficult and painful. In some cases, painful because people have to use political capital to push these reforms through. But that really is the only way. And it’s not just in India, that’s true in China, it’s also true for a country like Indonesia.
What does the US-China trade war mean to you?
First, we would say that it is not really about trade, it’s about technology. That is what the US is focusing on and that is what’s most important for China. You put those two together, the heart of this friction is about technology. The US is uncomfortable with the way China has risen in the global economy. It’s not just the speed with which China has risen, it’s the fact that increasingly the US feels that China is not playing by the global rules.
Does India tend to gain out of this trade war?
In some senses, yes. Some countries might get a bigger slice of the pie, and India is clearly one of them. So, think about what’s really at stake in China. It’s not some factory selling washing machines or t-shirts. It’s these very large, complex technology supply chains that have very complex ecosystems. What you need is a lot of capacity to absorb it. To some extent, maybe Vietnam has that capacity, maybe Thailand, Malaysia. But the supply chains in China are enormous, so you need a country with resources to be able to absorb that. India clearly has the potential to do that.
With the US Fed U-turn on interest rates, what’s in store?
Real interest rates globally are going to be lower for a longer period. So real interest rates are exceptionally low at the short end and the long end of the yield curves in the US, Europe, Japan, even China. In Australia, interest rates are falling. It is really hard to see debt crisis when interest rates are falling because the cost of maintaining that debt and servicing it is low. Although debt might be higher, the cost of servicing that debt is much lower and that is a very important net offset.