Policy certainty, structural reforms are key to growth: IMF’s Gita Gopinath

The International Monetary Fund (IMF) has sought to end the current calendar year on a positive note, stating that it was seeing “some tentative stabilisation” in the global economy, with signs of improvement in 2020.

“If the financial conditions remains easy from a global sense, and if the uncertainty that was building up in 2019 was reversing itself, 2020 could see a recovery and be better than 2019,” Gita Gopinath, Chief Economist, IMF, said at the 92nd Annual Convention of Federation of Indian Chambers of Commerce and Industry (FICCI), an apex industry body.

‘Signs of stabilisation’

Gita Gopinath highlighted that some of the big concerns of 2019 like the one on tariffs (expected US tariffs on China on December 15) has not happened, and with the announcement of the ‘Phase-I’ deal, there has been some reduction in the uncertainty over the impact of trade tensions (between the US and China).

There is also now reduced uncertainty over Brexit, and fair amount of easing of global financial conditions with several countries adopting monetary policy easing, she said.

The automobile sector, which went into a deep dive not only in India, but across the world, in 2019, is now bottoming out, she added.

At the same time, Gopinath also said that there were some downside risks including the re-emergence of trade tensions playing out.

On global outlook, 2019 was a year that started out well, but later there was a bunch of disappointing news, she said.

“Two sectors that were weak In 2019 were manufacturing and trade. There was continuous string of bad news with weakening PMIs and trade growth. We are now seeing tentative signs of stabilisation. So while through 2019 the services sector was holding up across the globe, there was a concern that the weakness in manufacturing would translate to weakness in services. You saw that in a big manufacturing country like Germany. More generally, services has held up and we are seeing signs of stabilisation across the world,” Gopinath said.

A cut in growth forecast?

India needs to first quickly fix its financing problem (accelerate its banking system clean up) and provide a positive sentiment for investments. India’s problems are in the financial sector, and the policy makers should address the same at the earliest.

Gopinath said that the stress associated with the Indian financial sector is deeper than projected.

“What we are seeing right now is the weakness in investments. If there is prolonged weakness in investments, that, by construction, affects potential growth because there is lower capital in the economy. A cycle where you end up with weak investments for very long time ends up being structural problem,” Gopinath said during her conversation with former FICCI President Harsh Pati Singhania at the annual convention.

Gopinath said that IMF will be revising the growth forecasts for India in January 2020, and indicated it would be significantly revised downwards. “Our expectation was slowing scenario in first two quarters of 2019-20 and an uptic in the third and fourth quarters. But looking at some of the high frequency indicators, we are not seeing the high demand we are projecting. This is why we will be revising the numbers in January when put the new update,” she said.

The IMF had in its October forecast projected 6.1 per cent GDP growth for India in 2019 and the same to go up to 7 per cent in 2020. After the country recorded a six-year quarterly low of 4.5 per cent GDP growth in second quarter, the RBI too had recently lowered its growth forecast for the country.

On NBFCs and rural economy

Gopinath said that weak credit growth in the system was a reflection of the weak supply problem as well as a weak credit demand problem. Monetary transmission by banks is weak and another source of supply problem in 2019 was NBFCs.

“Many of us expected that NBFCs will rectified by itself. But if we look at the data more closely there still seems to be stress there. Some high quality NBFCs are doing fine. But there seems to be a segment of NBFC that used to lend to MSMEs and households are still not in best of shape. On the demand side, the demand coming from rural is another factor that matter,” she said.

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Rural income growth is important, and Government has taken several measures, but that are not enough. “There is big need to raise productivity in agriculture in India,” she said.

Big reforms needed

Gopinath also underscored the need for more structural reforms in the land and labour front, if India has to raise its manufacturing share in GDP to 30-25 per cent from the current 16-17 per cent levels.

Also read:India should focus on structural reforms, says IMF’s Gita Gopinath

“To get manufacturing off the ground, and for India to have bigger presence on the export stage, that will require another set of big reforms. There are important reforms needed on land acquisition, labour laws and its hard to generate an ecosystem where you can end up with large-scale manufacture that can be part of global supply chain without these kind of reforms. We would like to think that with the government having the large political mandate, this is the right time to undertake reforms. But in the absence of it, India is losing out on the shift in global supply chains around the world with all the developments seen over the last year. But this (reforms) is not something to give up on,” she added.

Regulatory uncertainty

Gopinath said that regulatory uncertainty has played a role in this period of economic slowdown.

“Indian economy needs reforms, which are absolutely important. There also needs to be an environment of regulatory certainty — clear rules of the game and what particular policies are and how it will impact you. There has to be clarity. It is important for India to undertake reforms, but to do with greater clarity and greater certainty would help. This also applies to a good reform like GST, which is important for formalising Indian economy. But certainly there needs more to be done on what the rules are, greater compliance and all these make great difference,” she said.

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