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Modi unapologetically in favour of pro-market reforms: Sanjeev Sanyal

LiveMint logoLiveMint 20-05-2014 Joji Thomas Philip

Singapore: The new government led by Narendra Modi is expected to simplify tax systems, make government procedures more transparent and take steps to make government-citizen interaction less onerous, reducing the scope for corruption, Sanjeev Sanyal, Deutsche Bank AG’s global strategist, said in an interview.

Sanyal is of the view that the Modi government will pay special attention to sectors such as railways and urban infrastructure and will also decentralize power to the states to make them compete for investments.

With expectations running high, he said the new government’s supply-side measures would take at least 12-18 months to show results, and it would, therefore, be important for Modi to manage expectations and maintain focus on a long-term vision.

Sanyal also compiles Deutsche Bank’s annual Mapping the World’s Prices report, which compares costs across all major cities globally. His latest report highlights that a weaker rupee has allowed India to remain the cheapest major economy in the world despite a persistently high inflation rate. Edited excerpts:

As an economist and an author who has written two book on India, what are the broader historical implications of a strong government led by Prime Minister Narendra Modi? Also, given the federal structure of India, how difficult will it be to get reforms going?

Prime Minister(-elect) Modi has indeed been given the strongest electoral mandate since 1984 but it is equally significant that the theme of his campaign was “minimum government, maximum governance”. This makes him the first genuinely post-socialist political leader of India and the first to be unapologetically in favour of pro-market reforms. In other words, he has the mandate to refocus the role of the Indian state on basic governance.

As far as India’s federal structure is concerned, it is very likely that he may devolve more power to the states given his own background as a chief minister. Indeed, he has explicitly said so in his campaign speeches. This will encourage and enable states to reform in order to compete with each other. I think these would be very positive for India.

What are the key reforms that Prime Minister Modi is likely to implement to revive growth?

Looking at Prime Minister(-elect) Modi’s past performance as a chief minister as well as listening to his recent speeches, his economic policies are likely to have three pillars. First, he will rationalize the role of the government in the lives both of common citizens and of business. Thus, outdated laws will be repealed, the tax system will be simplified and government procedures will be made more transparent. All these steps will make the government-citizen interaction less onerous as well as reduce the scope for corruption.

Second, he recognizes the continued role of the government in providing “public goods”—especially heavy infrastructure and human capital. The railways and urban infrastructure will get special attention. Also expect a big boost for job-oriented skill development. Finally, there are many areas where he may decentralize power to the states in hope that they use the space to compete for investment.

As a global strategist, when you look at the Indian economy, there is a huge difference between sentiment and reality. Will the economy take a long time to match the current euphoric levels of the markets? There is high inflation, interest rates are high, near-term prospects for industrial revival appear bleak and demand is weak.

The financial markets have gone up very quickly and expectations are running very high. However, the new government’s supply-side measures will take at least 12-18 months to show results. This is why it will be important for Prime Minister(-elect) Modi to manage expectations and maintain focus on the long-term vision. Nonetheless, I am confident that inflation will have sharply declined in a year’s time and the Reserve Bank will be rapidly reducing interest rates.

In 18 months time, the manufacturing sector could well be booming. Meanwhile, it will be important to ensure that the rupee does not appreciate too far from current levels. In my view, Indian industry is not competitive at exchange rates that are much stronger than current levels. So, the Reserve Bank should allow significant rupee appreciation only after it has assessed the impact of supply-side reforms in a year’s time. For now, it may be better to accumulate foreign exchange reserves.

Do you think that labour market reforms will be a critical ingredient to accelerate India’s growth rate? Does the rural employment guarantee scheme and rural subsidies reduce incentives for surplus labour to migrate from agriculture to manufacturing and services?

Prime Minister(-elect) Modi’s vision of India is a radical break from the entitlements-based approach of the past. In his many speeches, he repeatedly talked about how India’s poor aspired to jobs rather than doles. Given his resounding mandate, it is clear that the poor and the youth agree with him. So, expect a push for manufacturing but also for modernizing farming. Meanwhile, the emphasis would be to accommodate the urbanization process rather than see it as a problem that needs to be slowed through rural subsidy schemes. This could happen through upgrading existing cities, building new cities but also through providing urban amenities like reliable power supply to rural areas.

Urbanization and the mass deployment of labour imply that labour reforms are important. However, it is likely that individual states will be encouraged to carry them out rather than expect top-down measures from New Delhi. This could be part of the increasingly decentralized approach to running the country.

Do you agree with economists such as Columbia University’s Jagdish Bhagwati that Reserve Bank of India governor Raghuram Rajan is an obvious choice to replace International Monetary Fund (IMF) chief Christine Lagarde someday?

Governor Rajan is arguably one of the most outstanding economists of his generation and is very well respected internationally. He appears to have done a good job at the Reserve Bank, although he took up the role of governor only recently. Moreover, he has been the chief economist of the IMF in the past and is very familiar with that institution. So, I agree with Prof. Bhagwati that governor Rajan would be a good choice.

In your recent report ‘Mapping the World’s Prices’, you said a weaker rupee has allowed India to remain the cheapest major economy in the world despite persistently suffering the highest inflation rate. Can you explain this in detail and also highlight what are the parameters you have considered when reaching this conclusion?

Our study looks at an array of prices from around the world and compares them in US dollar terms at existing exchange rates. We found that Indian prices were overall the lowest of any major economy. Depending on the basket chosen, Indian prices are usually less than 40% of US levels. Movie tickets in major Indian cities are less than 30% of New York levels and taxi fares less than 20%. Of course, given the difference in per capita incomes, Indians may still find it expensive. Nevertheless, there are some items like iPhonesand petrol that are more expensive in India than in the US.

In this report, you say that India’s position—as it still runs a large current account deficit—illustrates that being competitive is more than just being cheap. Can you share more insight on this?

Generally speaking, Chinese prices are around 30-40% higher than Indian prices in dollar terms. The World Bank’s basket, for example, shows China at 70% of world prices and India at 42%. However, economic competitiveness is not just about being cheap. It includes the efficiency of labour, quality of infrastructure and so on. This is why China remains so competitive as an economy while India struggles with current account deficits. Of course, competitiveness is not a permanent state of being. Chinese prices are slowly converging on world prices as the CNY (Chinese yuan) has appreciated. China will eventually lose its competitiveness in bulk manufacturing and move up the value chain. This can potentially open up space for Indian manufacturing. Meanwhile, in India, domestic prices have gone up sharply in recent years as it has suffered persistently higher inflation but a weaker exchange has broadly corrected for it. This is why I had earlier argued that the rupee should not be allowed to appreciate too far from current levels until we have corrected for internal inefficiencies.

When it comes to the index of going on a cheap date, Indian cities again rank the lowest or are the most affordable. What does this index indicate about global prices?

Our Cheap Date Index looks at how much it would cost in different cities to go on a burger-and-movie date. The basket includes cab rides, burgers, soft drinks, two movie tickets and a couple of beers. It’s just a fun way to gauge the cost of living but excluding the direct cost of real estate. Mumbai, Bangalore and Delhi are the cheapest places in the world to go on a cheap date at about 25-30% of New York. In contrast, London is the most expensive at 130% of New York.

Across different parameters, where does Singapore stand?

From an affordability perspective, Singapore is a bi-modal city because it makes a big difference which basket of goods one is measuring. It is the most expensive place in the world to buy a car but public transport is quite affordable. Similarly, real estate can be very expensive but most Singaporeans live in subsidized public housing.

Thus, it is one of the most expensive cities for an expatriate who wants to buy a car and live in a private house but, for its level of per capita income, quite affordable for a local who lives in a HDB (Housing Development Board) apartment and uses the MRT (mass rapid transit system). Similarly, education is relatively cheap for locals but international schools are expensive. Therefore, Singapore is a difficult city to classify.

In the larger context, what does it reveal when your report states it is almost as expensive to deploy a graduate from a top business school in Mumbai as it is in Singapore?

You are correct that our survey found that it costs almost as much to deploy a graduate from a top business school in Mumbai as in Singapore. Part of the reason is that salaries have become internationalized at the very best institutions. This reflects the shortage in good quality human capital. Moreover, good quality office space in major Indian cities can also be very expensive. These show up the structural inefficiencies of the Indian economy.

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