‘Economy is headed in right direction, effect of reforms will show up’

In India, we tend to oscillate between excessive optimism and excessive pessimism. For instance, in 2008-09, everybody was saying that we will continue to grow at 9 per cent. That irrational exuberance is what sowed the seeds for the crisis. Now, I think we’re on the opposite side. However, my feeling is that we have to be a little more wise in interpreting the data. Consumption growth has happened not because of two or three price rises or because of big promotional campaigns or a because of the Pay Commission - as industry stalwarts suggest. I think core consumption is fine. Second, over the past five years, there has been an emphasis on structural reforms — the bankruptcy code, direct benefit transfers, and lower inflation. Their effect will start showing. The economy is headed in the correct direction. We must not ‘overinterpret’ the data and have to be wise in the way we infer what’s going on.

In discussing the NBFC situation, most people talk about liquidity, but what is appearing as liquidity is actually solvency. In the NBFC sector, most players had long-dated assets, and short-term liabilities. In order to fund these long-dated assets, they rolled over the short-term liabilities. That works well when things are fine, but when things start becoming (bad for) even one firm - when IL&FS’s troubles started - all NBFCs find it difficult to rollover their short-term debt. An issue relating to solvency became a liquidity issue.

First, we have to monitor asset liability mismatches in the NBFC sector. Second, nearly 95 per cent of the ratings in the short term - for instance, the CP (Commercial Paper) - belong to the same rating category. If you look at long-term ratings, there’s a lot of variation; in the short term, they are all lumped together in the same bucket, even though there are substantial distinctions in the long-term credit. Within this set of over 95 per cent, which are in the short-term bucket, the long-term rating actually reflects a CP spread as well, which means the market is actually pricing it in there. But when you club all these borrowers into one bucket, short-term credit market investors don’t get as good information, especially when you have an NBFC that have you been using for so much short-term debt. The information that should be coming on the short-term credit, that does not come. So, these are issues we have to work on.

In a market economy, intervention should not create a situation where profits are privatised while losses are socialised. When a person invests in a mutual fund instead of a fixed deposit, he or she anticipates greater returns, but there is no free lunch. Higher expected returns come with some risk. And we become aware of risk only when we face losses. That’s the bargain that investors signed up for with mutual funds. If you make the case that the government should intervene, that is a case of privatising profits and socialising losses: that can’t happen in a market economy. It is unfortunate that investors suffer when mutual fund values go down, but that’s part of the risk in the investment.

The contribution of the agriculture sector to GDP it is not that large. And it is the agriculture sector that is impacted the most (by the monsoon). And what we don’t know is how much below normal it will be. If it is a few percentage points below normal, the effect on agriculture may be only a little. The projection is that it is not going to be drastically bad. Considering that agriculture is not that large a sector, I don’t think there is cause for worry.

India should look at this as an opportunity to identify sectors where we have a competitive advantage and look at countries where our exports have scope for further improvement. We should then come up with a concerted strategy to utilise the opportunity. More importantly, over the medium to long run, we need to focus on the competitiveness of our firms. For instance, compared to most other countries at a similar developmental stage, we have a preponderance of small firms, which are not able to exploit the economies of scale to become more productive. We should focus on this because in the export market, you have to be very competitive.

Of course, there are these risk factors. On the other hand, shale gas contribution is expected to be a counterbalancing force. Shale gas companies become viable only when oil prices exceed $50. We anticipate oil price to be around $70, and I think things should be fine. We don’t really expect oil price to go very high. Keep in mind thatt the world economy isn’t going to be doing that well this year. As a result, the demand for oil will not be very very high. Our own internal assessment that tells us that the external sector should be fine.

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