Debopam Chaudhuri, chief economist at ZyFin Research, says while the government has done a lot for businesses, the benefits are yet to trickle down to the common man. In an exclusive chat with VCCircle, Chaudhuri says the government has failed to concentrate on consumer sentiment but the economy will be back on track in two to three years.
How do you rate the performance of the Modi government?
I would bifurcate the report card into two sections. One is the micro-performance card and the other is the macro performance card. Micro is how the common people have been impacted and macro is how businesses have been impacted. If you consider the micro report card, life of the common citizen has not changed drastically—our income prospects are still the same and the interest rate scenario has not changed. On the micro level, I will give the government a rating of 3 or 4 out of 10.
On the macro level, the government has been very much functional. There have been significant steps in improving ease of business, putting in more for infrastructure developments and improving relationships internationally. Also given the amount of travel Modi has been doing, India’s perception among global leaders has changed—India is now perceived as a nation with potential. In terms of transparency, there has been a major improvement in government administration and various pricing processes. Earlier, it was difficult to gather information on pricing of agriculture and procurement prices. With the Modi government being active on the social media, these information points are now widely distributed. The spread between CPI rural and CPI urban has been coming down which suggests opaqueness in pricing has been coming down. On the macro side, I would rate the government at 7.
Combining both the elements I would rate the government a 6.5 at the moment knowing that the macro effects will ultimately benefit the micro-side of the economy.
You were talking about macro side ultimately effecting the micro. Is the trickle-down effect visible in the economy?
Modi’s tackling of the macro side is going to trickle down and have an impact on micro expectations in the near future. Looking at the consumer outlook index, consumers are feeling much better than they did in last three years and now that the government has taken up the challenge of economy by addressing growth situations, economic growth would lead to development.
There are two views regarding the government’s performance—one is that of optimism while there are others who believe that Modi has been all talk and less has happened on the ground. What is your view?
Less has happened on the ground as common citizens see it. On the broader aspect, it has been much easier for businesses to set up as bottlenecks are cleared. The government needs more time; in two to three years, the Indian economy will be back on track.
There has been a dichotomy between GDP and high frequency data. Considering that industrial production is still sluggish and the banking sector has not fully recovered, can we rely on GDP figures? Do you foresee a pickup in industrial production?
The dichotomy we are talking about is more from the point of industrial growth, as IIP is calculated on the basis of the old survey—that may be a reason we don’t see a major connect between IIP trends and GDP numbers. Maybe we are not comparing apples with apples. Otherwise, leading business cycle indicators—including that of ZyFin and SBI—have been pointing to a revival in the Indian industrial space. IIP with its inherent problems is not the right indicator to track the Indian manufacturing and industrial space—we should rely on indicators like HSBC PMI.
Is the government on track in ensuring that the capital markets are deepened and banks are adequately capitalised?
If you look at Sensex or Nifty, they have been on a roll since the Modi government came to power. There have been small periods of dips but the market has been on an upswing as domestic and international investors have become more confident about the Indian economy. Regarding NPAs, the government has refrained from going for big bang reforms—it has been taking small steps. The situation is the same for parallel economy or black money as big bang reforms will only harm the economy rather than benefit it given that business houses and a significant number of people are connected to it. So the government is doing the right thing.
Are recent trends in the stock market indicative of waning investors’ interest? Are there structural constraints that need to be addressed? Where are stock markets headed?
The recent trends in stock market are more a function of hot money leaving the country. There have been signs of the dollar and the US economy recovering rather than weakening of India’s fundamentals.
We saw markets stumble in 2013 when the then Fed chairman Ben Bernanke talked about winding down of stimulus. Given the expectations of rate hike this year, what impact will it have on the Indian economy?
Fed raising rates is no longer a risk—kudos to RBI for maintaining a very strict monetary policy which is quite forward looking. Many of us did not like the previous measures introduced by governor Raghuram Rajan but all of us are seeing the benefits. Our foreign exchange reserves and economic fundamentals have improved. We are better prepared to face any significant volatility with FII money flowing out as interest rates go up in the US.
What are the main drawbacks of the government’s policy? How can the government improve growth prospects of the economy?
Managing consumer sentiment is a major issue that the government has so far not concentrated on. At least 65 per cent of GDP comes from what you and I spend on the street and we are not an export oriented country like China—we are a domestic demand driven economy. While Modi is making the right statements by encouraging ‘Make in India’ as it is important to boost GDP, not much has been done to boost consumer sentiment per se. Consumers are feeling low on income prospects, employment and interest rates. The government is not doing much to address these scenarios and effective communication with citizens is lacking.