Rajeev Malik: India Is No Big Bang Story

Image: Madhu Kapparath for Forbes India

Rajeev Malik, Senior economist at CLSA

Rajeev Malik
Profile: Senior economist at brokerage and investment group CLSA, Asia-Pacific Markets
Age: 43
Education: Post graduate in economics from Delhi School of Economics and Tufts University
Career: Economist with JP Morgan, Macquarie and now CLSA
Interests: Photography


Is there any change in the investment patterns vis-à-vis last year?
Well, they are certainly larger. A good chunk of investors, especially the larger ones, still don’t have the kind of allocations that they would want. Indians or India specialists may be very well aware of the India story, but others are not aware. It is not as universal as, say, the China story. India is very much still an emerging story in spite of what Obama said (that India has emerged).

The RBI has said that external risks are quite high. What is your view?
There are two aspects to it. I think most of the risks are more domestic in nature; relating to government policy and execution. Government tends to over-promise and under-deliver.

The RBI’s comment has to be seen in the context of capital flows. It is easy to mistakenly believe that because India is going to grow at 8.5 percent and because the Sensex is at 20,000-21,000, everything is hunky dory. It is not. Globally, there is potential for a lot of things to go haywire, in either direction. The choice with India was two-fold. You say that we will grow at 6 percent and not have a current account deficit or say that we will grow at 8-9 percent and have a current account deficit of anything between 2.5 percent and 3.5 percent, but we make sure that we can finance it. I think the latter is a more relevant strategy because you can’t say that you will dance to the tune of global dynamics and go through the growth shock as well. Now when India is growing, more because of domestically-driven (factors), faster than other places, then the current account deficit is going to widen. So the current account itself is not the problem. The bigger concern is financing it. For example, even in the rest of Asia, where some of the countries run huge current account surpluses, in the aftermath of the Lehman bust, their currencies did depreciate. So the notion that if India did not have a current account deficit there would be no worry on the rupee is actually, technically, incorrect.

The RBI has also said that supply side constraints can be, technically, faced by imports. That will widen the trade deficit...
There is a lot of obsession in India with FII flows because it is more market newsworthy. But the bigger issue is FDI has to go up as well. India can control and manage FDI volumes into India. But it cannot manage portfolio flows. So if tomorrow for whatever reason there is a huge jump in risk-aversion, portfolio flows will be impacted but FDI flows may not be. This is why it is important for the government to move more rapidly on the FDI front.  

Basically, you are saying that the onus is entirely on the government.
It is absolutely true. The execution and the policy are certainly with the government. See what is happening with, say, resource-based industries and the environment ministry. It is not as if other countries don’t have differences between ministries but they sort it out without making a tamasha out of it. In India’s case, for a variety of reasons, it is a more public affair.

So what would the outcome be in the short to medium term?
India has not been and is not likely to be a big bang story in the near future. A big bang is either when there is a crisis so you don’t have an option and therefore you have to do the unpleasant, but right, stuff or it is a forward looking government which has the political muscle to bear the consequences of a big bang. Unfortunately, we don’t have that here.  

Will the government’s incrementalist approach push away investments?
Beyond a certain point, people will lose patience. The demographic dividend that a lot of us are relying on is not going to be there forever. Yes, it will be there for the next several years but we should use it in a more effective manner rather than just relying on it to not do many of the other things.