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Informist, Monday, Aug 26, 2024

 

--IMF's Salgado: See scope ahead for RBI to cut rates, but not now

--IMF Salgado:RBI may cut rates in 2024 only if food prices sharply dn

--IMF's Salgado: RBI is appropriately cautious on rate action

--CONTEXT: IMF India resident representative's comments in interview

--IMF Salgado: See food prices coming dn on reasonably good monsoon

--IMF Salgado: See India core inflation gradually rising towards 4%

--IMF Salgado: Hiked India GDP forecast on better rural sector growth

--IMF Salgado: Uneven monsoon rain may pose risk to India's growth

--IMF Salgado: Lower than expected global growth risk for India

--IMF Salgado: High commodity prices risk to India's growth

--IMF Salgado: See green shoots in private investment in India

--IMF Salgado: Shifting global supply chains may benefit India

--IMF Salgado:See slight slowdown in urban demand on high base effect

--IMF Salgado: Do not believe Indian debt is unsustainable

--IMF Salgado: We'd like to see India debt levels come down

 

By Shubham Rana, Pratiksha, and Sagar Sen

 

NEW DELHI - There is a case for the Reserve Bank of India's Monetary Policy Committee to cut interest rates in the current calendar year only if food inflation comes down faster than expected, according to Ranil Salgado, senior resident representative to India, International Monetary Fund.

 

"If food inflation comes down faster than we envision, there could be opportunities even in 2024," Salgado told Informist in an interview on Thursday. "But it is contingent on food inflation coming down and mainly headline inflation coming down."

 

Salgado said the RBI was appropriately cautious in its rate action as food inflation has a major impact on how households set their inflation expectations in India. "They don't want the second-round effect from high food prices to feed into generalised inflation and that's been the history of India," he said.

 

RBI Governor Shaktikanta Das has repeatedly said that the central bank needs to keep the monetary policy actively disinflationary so as to align headline inflation with the 4% target. In his minutes of the August MPC meeting, Das said that persistent food inflation is imparting stickiness to headline inflation, and that monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components. 

 

Food inflation has remained high over the last one year, but is expected to moderate going ahead, dependent on an above-normal southwest monsoon. Food inflation fell to a 13-month low of 5.4% in July, mainly because of a statistical effect of a high base.

 

Salgado said that the IMF expects food prices in India to come down because of a better monsoon than last year. "I don't think (it will be) a wonderful monsoon, but a reasonable monsoon compared to last year," he said. The IMF also expects core inflation to gradually rise towards 4% from 3.4% right now. "Food inflation coming down, core inflation coming up, but on balance, headline inflation is coming down," Salgado said.

 

When asked if the RBI should target inflation without food prices, as suggested by the Economic Survey, Salgado said the headline inflation target is appropriate, because food inflation ends up affecting inflation expectations and "if inflation expectations are high, that makes it hard to bring core inflation around 4%".  

 

Following are the edited excerpts from the interview:

 

Q. The IMF recently raised its India 2024-25 growth forecast by 20 basis points to 7%. What do you think is the most prominent risk to this forecast?

A. We raised the forecast because we viewed the developments, particularly in the rural sector, as stronger than earlier. In that sense, the most prominent risk would be the monsoons, which at least in volume seem to be doing very well. But you never know in India, because of the spatial and temporal distribution. And therefore, until we see exactly how the harvest, how the agricultural production comes out, and its impact on rural incomes, from a domestic sense, that's the biggest risk.

 

Of course, there are multiple international risks as well. If there's a global slowdown more than we think, the IMF is expecting growth over the next couple of years globally to be around 3%. We're fairly confident in that. We think risks are balanced around that, but if downside risks emerge, that would be a second risk to India's growth.

 

The third significant risk would be if commodity prices, especially oil prices, jump up. And that has a major impact on India.

 

Q. And on the flip side, what is the possibility that the IMF may further raise this forecast?

A. We'll have to see developments. And if developments are stronger than we expect, we would revise up the forecast. I would say the other potential on the upside positive beyond rural incomes being even stronger than we imagined, is if you really see growing signs that private investment is rising.

 

We think there are green shoots there in terms of private investment. But we'd like to see it in the numbers.

 

Q. Have you seen some trends over the last few quarters on improving private investment? Or what sort of trends do you expect in the next few quarters?

A. There are a few reasons to believe. So first, I think private investment announcements have been relatively strong. The question is, do they get implemented? That's point one.

 

Point two, you look at the corporate sector and the banking sector having very good balance sheets relative to the past. So you would imagine there should be a pickup in private investment, especially now that capacity utilisation rates appear to be above 75%. That's the other big thing that capacity utilisation now has risen to the level where you'd see private investment rising.

 

And then a final point to be said is there are long-term factors that should be helping India raise private investment. The substantial public investment, infrastructure investment that the central and state governments have been doing.

 

And finally, the shifting patterns of global supply chains, which could benefit India.

 

Q. You mentioned there have been a lot of investment announcements. Do you see them actually put that money on the field and put in capex investments out there?

A. This is what we're waiting to see. I think the RBI suggest they have some evidence that's happening, but we're not quite seeing it in the data yet. Based on what the RBI is saying, it's suggestive that there could be something.

 

Q. What is your outlook on the urban consumption? Do you think it will continue or is there some petering out?

A. We're assuming a slight slowdown in urban consumption because it's off a very high base, but not a substantial slowdown. So far, I don't think there's any evidence of a significant slowdown. We're assuming rural doing better, but urban may be flattening out or slowing a little bit, but not much.

 

Q. Ever since the COVID-19 pandemic, India has maintained a GDP growth rate of around 8%. Do you think that is also a sign that the potential growth has risen for the country?

A. At this stage, we're not yet confident potential growth has risen. Remember, post pandemic, partly it was a recovery from the pandemic itself. That is our assumption on why growth has been stronger.

 

The IMF views potential growth in the range of 6-7%, around a midpoint of 6.5%, which is a little higher than what we had earlier. Earlier, especially towards the end of the problems in the NBFC sector, we had lowered potential growth to around 6%. We do see a pickup from that and that's consistent with the longer term experience of India. India tends to grow in almost any 10-year period in the range of 6-7% for recent decades.

 

Q. Food prices have been a concern for quite some time now. When do you expect inflation to fall to 4% target?

A. We have inflation in our own forecast falling towards 4%, but slowly over the next couple of years. We have it down to about 4.1%, which is essentially within rounding area of 4%. If you look at our inflation forecast, we expect food prices to come down, because we think there is potential for a reasonably good monsoon. I don't think we will have a wonderful monsoon, but a reasonable monsoon compared to last year. And that core prices will gradually rise towards 4% from the low threes right now.

 

It's food inflation coming down, core inflation coming up, but on balance, headline inflation is coming down.

 

Q. RBI has been very vocal that it will not look at a rate action unless inflation is sustainably around 4%. So in that context, do you think RBI may be late in cutting rates?

A. The RBI, in our view, is appropriately cautious. In India, food inflation has a major impact on how households and everyone sets their inflation expectations and they don't want the second-round effect from high food prices to feed into generalised inflation and that's been the history of India.

 

In our own view, if inflation trends evolve in line with what we expect, we do see opportunities going forward for the RBI to cut rates, but not now. It depends on how quickly, if food inflation comes down faster than we envision, there could be opportunities even in 2024. But it is contingent on food inflation coming down and mainly headline inflation coming down.

 

Q. The RBI governor recently said that till inflation is not at 4% and aligned with 4%, they are not looking at rate cuts. In your view do you think if they see a sufficient trend that while it is not close to 4%, it is moving towards 4%, they can cut rates even if inflation is not at 4%.

A. RBI targets 4% inflation over medium term. They need to be confident, including when you take into account rate cuts, that 4% would be achieved and that's how they will view it. It has to be 4%, including whatever policy changes you make, and you will achieve 4%.

 

Q. The economic survey this year suggested that maybe RBI should target inflation without food prices. What is your view on that?

A. We think the headline inflation target is appropriate, because food inflation ends up affecting inflation expectations and if inflation expectations are high, that makes it hard to bring core inflation around 4%.

 

Q. The US Federal Reserve seems to be on the verge of cutting rates next month and people are looking at over 100 basis points rate cut cycle. With the Fed starting to cut rates, do you think there will be a chance that RBI may also jump on the bandwagon?

A. India is a large economy, and it does have capital controls. Therefore, India has flexibility that many other countries do not have. Given that, and its inflation targeting regime, it should focus on its core target, which is 4% over the medium term. I mean they have 2-6%, but 4% of the medium term. To the extent the Fed is cutting has an impact on Indian inflation, yes, but other than that, no.

 

Q. IMF had said last year that India's debt is not sustainable in the long-term and debt to GDP can rise above a 100% if some of the risks which India had faced previously surface again. India had a different view. What is your view on this?

A. We have a debt sustainability analysis that has various stress tests and only in some of the extreme cases does Indian debt rise above 100%. In the base line, we have Indian debt falling. So we are exactly in line with the government on this.

 

We do not believe Indian debt is unsustainable. We are supporting the government’s view on bringing the debt down next fiscal year. We expect a few more measures to come in next year and given that it should be achievable, the 4.5% fiscal deficit. We are very confident about this year which is 4.9%. It looks like things are in place.

 

In that case debt-to-GDP will continue to come down gradually. What we are looking forward to now is next year when the budget comes out to hear more about what happens next. You know in the past with the Fiscal Responsibility and Budget Management Act, for central government there was a 40% target, general government 60% target. Now that we had the COVID incident, we'd like to see what the government's view is in the longer term in terms of is it a deficit target? Is it a debt target?

 

Q. So do you think in the medium term that 3% fiscal deficit and a 40?bt-to-GDP ratio is plausible for the central government?

A. That's something we'll have to assess. What we'd like to see at the moment is debt levels. We don't have a specific fiscal deficit but I think we'd like to see debt levels come down. I mean we focus more on the general government as opposed to the central. But in that context you'd need both the Centre and states to reduce their debt levels.

Q. You mentioned 4.9% fiscal deficit earlier. Do you think that the government can better it?

A. If revenues continue to perform strongly, yes. That's the main thing. The government was appropriately prudent in terms of assuming revenue growth. So there's a possibility like last year, revenues could be exceeded (from Budget estimates) this time as well.

 

Q. If they do look at reducing the debt to GDP, say post FY26 also, do you think they'll have to sacrifice on any of the commitments?

A. I think in addition to consolidation, what's good about the government's fiscal policies has been the shift in the composition, right from revenue expenditure to capital expenditure.

 

They have been able to contain revenue expenditure by keeping revenue expenditure growth below nominal GDP growth. I think that policy can continue to work. But the main thing we are advocating is the need to consider further domestic revenue mobilisation. Ways to do that mainly are what we'd say broadening the base on both, indirect meaning GST (goods and services tax) and direct taxes meaning income taxes - corporate and personal income taxes.

 

So broaden the base as opposed to any difference in rates. On GST that means something like simplification, going to fewer rates (slabs). We think that helps further formalise the economy. So you get more companies into the GST net. That's how you increase the base over time.

 

Q. Since 2017, one of the key debates around GST has been should fuel, petrol, and diesel be included under GST as well. What is your view on that?

A. That's somewhat more complicated issue. Optimally, yes. But we do know that some of those changes are more politically difficult to include. We'd like to see a more comprehensive GST including consideration of that possibility.

 

Q. The IMF had reclassified India's de facto exchange rate regime for December 2022 to October 2023 to a 'stabilised arrangement' from 'floating' last year. Has there been any change in that view? Why? 

A. That's something we will have to assess again. The next article IV review will be late this year. At that time, we'll reassess. What I would like to point out is that's very much just a technical thing.

 

The IMF looks at how much the rupee moves usually against whatever the dominant currency is, in this case the US dollar, and it looks in a six-month window. In the six months when we last made the assesssment it hadn't moved enough, the volatility was too low and that's why we made this assessment as stabilised.

 

Q. The RBI had called the IMF's reclassification of India's exchange rate unjustified, citing the use of selective data. The RBI also said that India's stable exchange rate reflects the strength of macroeconomic fundamentals and improvements in India’s external position. What do you have to say to that?

A. We agree in terms of stable fundamentals. Let me emphasise that India's macroeconomic fundamentals have been quite stable. When the RBI says selected data, I think they're saying the length of the period, so we did look at six months. I think that's their concern if you look at longer periods, the rupee has moved more.  End

 

Edited by Vandana Hingorani

 

 

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