'India has always been an unequal society'

Consolidation of fiscal policy, resolving land and mining problems and rethinking agriculture reforms are the urgent steps that the government needs to take, says JPMorgan Chase's chief economist, India.

There is a need to restart investment cycle and provide a stable macro policy environment, says Jahangir Aziz in an interview to Faisal Kidwai

Here are the excerpts:

Why do you think the Indian government is having such a difficult time in pushing through reforms?

Well, clearly there are political constraints at this point in time. The UPA government has initiated a number of reforms but they have been stalled due to the political impasse.

In your view, which sectors need urgent reforms?

Fiscal policy itself is over-simulative and needs more consolidation that what is currently planned in the FY13 Budget. In addition, there is a clear need to resolve land and mining problems and rethink reforms in agriculture.

Rising inflation is a big problem. So, what should be done to reduce food prices and cut subsidies?

India needs to rethink its agricultural policy. For the last two decades agricultural productivity has been tied in the 3-4 per cent range, while real incomes have risen at twice the pace. As a result, food demand has outpaced supply.

Successive governments for the past 25 years have essentially thrown money at the problem in the form of higher minimum support prices and more fertilizer subsidies hoping the problem will go away. It hasn't. The government needs to go back to providing substantial medium- and long-term public investment in agriculture.

In the past year or so, there has been a lot out of outflow of foreign investment. What should the government do to attract foreign investors?

Foreign flows weakened because domestic investment languished and the macroeconomic uncertainty increased. Rather than trying to tinker around with foreign inflows, the government should focus on helping the investment cycle to restart and providing a stable macro policy environment. These are not only needed for their own sake but would also reignite foreign investor interests.

The only area in which the government can make specific changes is to improve the framework of debt FIIs. The FY13 Budget has promised to do so. Let's see how the new policy is implemented.

What are your expectations from this fiscal year? Are we headed for slow growth?

It's hard to say. There are positives and negatives. The global environment is much stronger now than it was few months back.

Europe is over the point of extreme bearishness. But growth is still weak. The US economy has performed much better than expected, but still it is growing just about at trend rate. And it has its own fiscal problems and is facing an upcoming election cycle. China is slowing down quite perceptively. So, while there are positives and negatives, the overall global environment is significantly better than it was last December, for example.

At the same time, India is facing its own challenges. The political environment has become much muddier now than it was before the state elections.

How India fares in the next 12 months and what the government plans to do in the year will become visible in the first few months after the Budget.

It is estimated that there are more 400 million people living below the poverty line in India and income inequality is rising in the country. What should be done to reduce poverty and bridge income inequality?

These are two different problems: eliminating poverty and inequality. The first is a problem, the second isn't. India has been an extremely unequal society for thousands of years. Fears that inequality may have increased in recent years when India has grown at nine per cent may well be true, although we have no data on this, but it would have been little solace to the person living below one dollar a day if instead of growing at nine per cent, India grew at five per cent.

There are many different poverty reduction schemes India has tried since 1947. None of them have actually delivered any palpable result. I think India should try growing at nine per cent for a decade or two and see what happens.

Sustained growth has almost always reduced poverty significantly. Growth eventually is the only way poverty can be reduced. Unfortunately, it is a non-linear relationship. Nine per cent growth over five years may not reduce poverty substantially, but over a decade and half it certainly does.

You have written that Indian banks hold nearly a third of their assets in bonds. Do you think these assets could turn toxic?

I think toxic is a bit strong a word. The chances of government bond turning toxic in India is very low, India is not Greece. But, clearly, the trouble here is that a third of bank assets are held in supporting government bonds and not in supporting investment and growth. When India grew at nine per cent over 2003-08, a key driver was the significant fiscal consolidation that reduced government borrowing and allowed space for investment to increase.

That means Indian government's debt is manageable?

India has never had a debt default problem. Since 2003 debt-to-GDP ratio has declined from over 70 per cent to around 50 per cent for the central government. Chances of Indian government defaulting is very low.

What can happen is that in order to keep financing its expenditure, the government keeps up using more resources from the economy, so savings get diverted to funding the fiscal deficit rather than funding corporate investment.

What should be done to address the current account deficit problem?

If you have large fiscal deficit, if you have government take away savings from financing private investments and private consumption, it means current account deficit will increase.

The current account problem is not a separate issue; it is related to what's been to the fiscal deficit. If the government is unable to bring fiscal deficit under control, if the government is unable to provide space for private investment and consumption to grow, we are not going to get growth, we are not going to get inflation down and we are not going to get the current deficit account down either.

You have mentioned that China is slowing down. What are the reasons for its downturn?

China has a larger exposure to export; about 18 per cent of Chinese exports go directly to the European Union and the EU is slowing down, so demand has been hit. China saw a very large trade deficit last month.

At the same time, China has clamped down on the real estate sector on concerns of housing sector bubbles. Because of this clamp down domestic investment has also slowed.

Given the headwinds on both the export and real estate fronts, the Chinese economy is slowing down.

The United States is witnessing an improvement in the job market, so do you think things are improving in the US?

The job market is getting better and, at the same time, we have seen in the past three months pretty strong retail sales numbers and, while there are still number of headwinds - including fiscal problems and the fact that Europe is likely to remain weak - the US seems to be repairing well.