India will need to undertake a lot of very serious structural reforms to meet the aspiration of being an advanced economy by 2047, Krishna Srinivasan, director of the Asia and Pacific Department (APD) at the International Monetary Fund tells Deepshikha Sikarwar in an interview. The IMF in its Regional Economic Outlook has forecast India’s growth at 7% for FY25. Edited excerpts:
You have kept the growth projection unchanged for India. But some domestic economists have begun to slash their estimates…
We take note of the mixed performance and select high frequency indicators. Some moderation in these indicators was expected as the post pandemic pent-up demand, especially among urban consumers, has logged its course and base effect has dissipated. At the same time, we expect strengthening of rural demand in light of the relatively stable monsoon. So, our forecast has GDP growth easing from 8.2% in fiscal year 2023-24 to 7% in 2024-25 and then going back to what we call the potential growth of 6.5% in 2025-26. There are risks to the outlook. Demand could be weaker than we expect. You have external shocks coming in, so there are downside risks to the outlook. We have the article IV consultations in December and at that time, we’ll have more data points to look at to see whether we need to revise down. But at this point in time, we are comfortable at 7% for this year and going to 6.5% potential starting next year.How do you see the escalating conflict in the Middle East impacting India?
These are fast moving developments. Things are happening every day so it’s very hard for us to document the overall impact very quickly. What we do see is countries in the region have all been affected a lot more because they are in the eye of the storm of the war right now. On its impact on India, what we’ve seen so far is that there could be some trade disruptions, which it’s not the same as in 2022. Its impact on oil and commodity prices has been relatively muted. Overall, a 10% increase in oil prices leads to global GDP coming down by 0.15% next year and an increase in inflation of 0.4 percentage points. These are global numbers. For a country like India, which is a large oil importer. These numbers could be higher. So those are the kind of risks you have to watch out for.In terms of the measures, do you think this growth rate is what we are anticipating in the next few years, would it suffice for India to actually meet its 2047 goal?
The goal is to be an advanced economy by 2047. Growth rate of 6.5% will not be enough to meet that goal. To meet that aspiration, lots of very serious structural reforms have to happen. If you were to start even today with growth at 7%, India is not generating a sufficient number of jobs. India adds 14 million people to the labour force every year. In the short run you have to implement the labour codes to make the labour markets a lot more flexible, allow greater efficiency. Second, if India wishes to better integrate service supply chains, allowing firms to compete more effectively, it needs to reduce a lot of trade restrictions. The average tariff has gone up in India over the past 10 years or more. We need to work on removing the trade restrictions. The third thing is to continue to focus on both physical and digital infrastructure. These are the three things which I think are very important for the short term. But going beyond that to have greater potential growth, India has to advance a lot of reforms in strengthening education and skills, advancing land and agricultural reforms, strengthening the social safety net and reducing red tape. If you want to grow at a much faster rate, to get to the levels which you are talking about, you need to have upwards of 8% – 8.5%.On your point on rise in tariffs in India, it has signed multiple free trade agreements reducing tariffs and influx of cheaper goods is seen as a serious concern. What prompted the statement?
You’re seeing a world which is fragmenting along many dimensions, including trade. What we showed in many of our analyses is that from a long-term perspective, fragmentation of this kind hurts everybody. The point is not that you just reduce trade restrictions. It’s a package of reforms you have to undertake. If you lower trade restrictions, you have to make sure that local firms can compete. That’s why implementing the labour codes is important because firms can make well informed decisions on how much labour to keep and what kind of flexibility you have and so on. You lower trade restrictions, you improve infrastructure, you reduce your red tape, you implement labour codes –all that to make the Indian firm that much more competitive. You have to open up the services sector much more because most countries in Asia are closed when it comes to services. So, you have an opportunity going forward and to do that, you have to work on many reforms, including on trade, alleviating trade restrictions. But again, it’s a package of reforms.
There has been some discussion in India, which has done well in services, attempting to ramp up manufacturing. Can it still spur manufacturing or just focus on its services sector?
India is adding 14 million people to the labour force every year. So, India doesn’t have a choice in terms of focusing one or the other. You have to work in every sector of the economy —manufacturing, services. There are many studies which show that manufacturing generates more jobs and even within manufacturing, you can have the low skilled, and you have the higher skill manufacturing which almost blends into services. For every kind of manufacturing there you have an element of services. So, India has to partake in both manufacturing and services. The broader point I would make is that you embrace the reforms, which I talked about, that would help the investor in India decide whether he or she wants to invest in manufacturing or in services. We clearly have an advantage in services if we look at financial services, business services and so on but it’s not clear that the service sector will generate the jobs that India needs to create. So, you have to move on both manufacturing and services. And you have not missed the bus. You can still do it. There are areas in manufacturing where you can really catch up. We have in a just released paper talked about how countries in Asia, not India necessarily, but the Asian countries have kind of taken advantage of the trade which is being targeted by China and the US. You have a China and US tariff war in certain sectors. You see that a number of Asian countries have actually ramped up their exports in those particular sectors.
In the budget, India has announced its intent to transition to debt-to-GDP ratio as part of fiscal consolidation. How do you see this move?
If you look at debt trends in Asia, they have not been that reassuring. Starting from the global financial crisis in 2007, public debt levels in Asia have been rising quite steadily. In some countries, like China, they have more than doubled. In Japan it is at 250% (of GDP) and above. And India also, debt levels remain pretty high. But the second point I’d like to make is that the (Indian) government has been very good in maintaining fiscal discipline. Even in the context of the elections, I think the fiscal discipline has been maintained well. I think those are things which we need to recognize. The intent is good and they have been working towards that. In every country we talk about fiscal reforms and fiscal frameworks it’s good to have a debt anchor. We usually have a rule of thumb saying 60% is good to aspire for. If you have a debt anchor, it automatically translates into how much deficits you can have. Public debt ratio provides you the anchor for you to think about what you want to do on an annual basis on fiscal deficit. So, the two are linked. I think it’s good for India to think in terms of a well-defined medium term fiscal framework with a debt anchor.
How do you see the Chinese economy?
In July, we had projected China’s growth at 5% for this year. The first quarter numbers in the Chinese economy came out well but since then the numbers on economic activity have been most sobering so we have revised down our forecast to 4.8%. But there are two things to watch out. One, the 4.8% does not reflect the Q3 numbers which came out much weaker than we had expected. At the same time, they announced two sets of measures, one monetary and financial in September, and another one fiscal in October. Our latest numbers do not take into account the fiscal measures which were announced in October. We have two offsetting forces for 2024, lower Q3 but more measures. That provides you a balanced risk for 2024. For 2025 if the fiscal measures are larger than what have been announced, and they are well quantified, you could have some upside to 2025, which we right now have at 4.5%. These measures are in the right direction in terms of trying to boost demand, in trying to help the property sector, but we don’t think they’re sufficient. What we have said is to rehabilitate the property sector comprehensively the Chinese Government needs to spend about 5.5% of GDP over 4 years. We have also said that China is facing a pivot and they need to move away from the old model of investment and export-led growth to a model of growth which is based more on domestic consumption. We are saying that they need to really ramp up emphasis on social safety nets and improve reform, pensions and so on.
How do you see the outcome of US elections playing out for the large Asian economies like India and China?
I won’t talk about politics. That’s not our expertise. We have no views on that. What we have seen over the past few years is there has been a lot of fragmentation, which is not just trade fragmentation, but also investment fragmentation. That has been inimical to prospects around the world. Going forward, what we would hope is that that fragmentation comes down — we have shown that when you have fragmentation intensifying, everybody hurts in the long run. In the short run, you could have some kind of trade diversion and some countries will benefit. For example, some countries like Vietnam and Mexico have been serving as connected countries and they have benefited. But there too, we find you will compromise trade efficiency. It’s a costly economic detour when you go through a third country. So, it’s important that whatever happens, we work towards a more integrated, less fragmented world.
