India working to improve its data provision, says IMF's Ranil Salgado

India can grow in the 7-7.5 per cent range, based on its underlying policies, says Salgado

India must do more on labour market reforms, and improve governance in public sector banks (PSBs), according to Ranil Salgado, International Monetary Fund (IMF) mission chief for India. In an exclusive interview with Anup Roy at the Washington headquarters of the IMF, Salgado said the rupee is fairly valued considering the current account deficit has sustained at around 2.5 per cent of GDP. Edited excerpts:

India’s growth rate has fallen to 7.3 per cent. Is it possible for India to get back 8 per cent in the near future?

India can grow in the 7-7.5 per cent range, based on its underlying policies. The key question, though, is whether it is sufficient over the long term? We think there needs to be an acceleration in economic reforms, including labour market reforms, and the underlying capabilities of the average Indian need to be boosted through improved health and education. Simplifying labour market rules would encourage companies to grow to more than, say, 100 people. And India should try to take advantage of its success in services, especially high value-added services. But boosting the manufacturing sector is more likely to help larger parts of the economy. We do know that is a goal of both the current and previous governments.

The government has initiated a few reforms such as GST, IBC etc. and you talked about labour market reforms. What are the other reforms needed?

Good steps have been taken in the financial sector in terms of recognition of stressed assets, implementation of the Insolvency and Bankruptcy Code (IBC), and re-capitalisation of the PSBs. We would like to see more, though, on improving the governance of PSBs. Going forward, it is important to make sure the problems of the past don’t recur. We would also like the government to rekindle the fiscal consolidation process and address concerns about a relatively high general government debt. This is in the government’s own framework. They want the general government debt down to 60 per cent of GDP.

We would like to see an improvement in the human capital indicators, such as education and health, as also in the business environment. Agricultural sector reforms and improving women labour force participation are also important.

What is your opinion on the Reserve Bank of India’s (RBI’s) back-to-back rate cuts?

Back in the fall, when inflation was higher and India was facing higher global oil prices, we were advising more to be on a tightening mode. In the past six months, we have seen that prices have continued to surprise on the downside, and headline inflation has fallen to the bottom end of the 2-6 per cent range. Since India targets headline inflation, that provides a scope for the RBI to ease. Our view is the two easings so far are appropriate. Going forward, we hope that the RBI remains vigilant to possible upward price pressures, especially if food prices rebound, because core inflation and inflation expectations still remain above the mid-point of the target range.

There is a debate going on about the sanctity of India’s data. Recently, more than 100 economists signed a petition. What is the IMF’s opinion?

India is working to improve its data provision, specifically in the national accounts. As we have noted in our previous staff reports, our main concerns are related to the price deflators and measurement of the informal sector.

Which deflator have you suggested?

India — and this is not unusual for a country like India — uses what is known as a single deflator method and the standard we hope they move to is double deflation.

What is your view on the banking sector consolidation in India?

Not necessarily consolidation, but there is a need for more divestment of the PSBs, and gradually moving away from a PSB model. PSBs own about 70 per cent of the banking assets in the economy, and we think that number can come down.

What is your view on the fair value of the rupee?

We don’t assess the exchange rate directly. Instead, we first look at the current account. For India, we see a sustainable current account deficit of about 2.5 per cent of GDP. And that’s roughly what we are forecasting for it right now. For that reason, we say that India’s external position is in line with the medium-term fundamentals. So, we don’t see any real exchange rate undervaluation or overvaluation.

After the IL&FS defaults do you see India’s NBFC sector has some inherent stress and there could be some bubble building up on the housing finance side?

We don’t think there is a broad stress in the sector. When IL&FS came up, we were very concerned that it was not just IL&FS. And we had discussions with the NBFCs and the RBI, and we became more convinced that it was idiosyncratic in part of the NBFC space. We still have some concerns on the housing finance side, which seems to be somewhat stressed. The national housing bank did put in a backstop to support the HFCs. The positive side is that not many of those HFCs needed to use the backstop. But that’s something which needs to be watched.

What is IMF’s view on various promises by political parties, especially this NYAY scheme of Congress?

NYAY and the government’s proposal in the interim budget are not the same as universal basic income, but you could call them some form of a quasi-universal basic income. And the way we want to assess that is to look at the benefits against the potential cost. The main potential benefit is poverty alleviation, and you want to see how well they target that. We would like to see the overall costs of the proposals and whether it fits in the framework of India bringing down its public debt—both sides want that reduced to 60% of GDP. We think to make the numbers work, there has to be a more comprehensive reforms of subsidies, which could provide some scope for such schemes.

What is your view on heavy borrowing by the government, and the states, and the private sector?

The overall debt level, for public and private, are is not that high for India compared to other countries because the private debt levels are not very high. That’s not to say there’s no problem on the private debt side. It is important to ensure that the debt on the private side is serviceable. We would like to see some consolidation on the public side as well noted earlier.