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Big reforms key for 2nd stage eco recovery: Credit Suisse

The Indian economy “stands apart” on the global stage, benefiting of a combination of low commodity prices, little exposure to China, having a strong domestic consumption story, as well as having fiscal space for an investment boom, says Santitarn Sathirathai.

In an interview with CNBC-TV18’s Shereen Bhan, Sathirathai, Head of India Economics Research at Credit Suisse, said that the economy had now crossed phase 1 of its recovery but added several big reforms were needed to push it into phase 2.

“We need to see structural reforms on GST, land acquisition, labour reforms and on bank recapitalization,” he said, adding that falling inflation was a major boost and that the RBI may cut rates by 25 basis points at its upcoming monetary policy meeting.

Below is the transcript of the interview on CNBC-TV18.

Q: How do you see the Indian economic story?

A: Growth environment is very challenging. India really stands apart benefiting both form the lower commodity prices, somewhat less exposed to the slowdown in China, have its own domestic growth story and also policy makers have some policy space in which they can use to boost the economy as well especially with a low of inflation.

So, I think it is pretty good growth story but then investor would start to look forward. So, I would say that India is very much in a first phase of recovery where you see low interest rates, low inflation helping a house of consumption, urban consumption specially but then what about the next phase?

Q: So what worries you about the next phase?

A: The next phase is where you really need more structural reforms. You need a goods and service tax (GST) to come through. You need a land acquisition to improve. You need a labour reforms all these things will be very vital for the second stage of the revival. Especially, bank re-capitlaistaion as well so that bank can really participate in funding the investments.

Q: How concerned are you about growth slowing down in China? What is the worst case scenario that you are factoring in as far as China is concerned? And the debt situation in China, how significantly would that weight the picture down even further?

A: We still think there is no hard landing in China, of course there is always that risk, but I think it is quite low. But in this situation, a most likely scenario is that you continue to have this sluggish growth and every now and then, China will come out, the government will come out, do some fiscal stimulus just to cap the downside in growth.

Q: Is that enough? Because, as of now, it seems to be more driven towards the equity markets and keeping the equity markets out of the panic zone. But is that enough, the kind of intervention we are seeing from the government?

A: I think it is just enough to cap the downside and prevent the hard landing, but it is not enough to get really the upward lift to growth. So, most of the Asian economies that were banking on China’s growth revival, now they have to find other catalysts for their own growth because they cannot rely on China anymore.

Q: When do you really see that big lift-off as far as capital expenditure is concerned?

A: That is a tough question, I think what we are banking no more in our growth is actually the help from the monetary policies side. Not so much as a rate cut but the falling inflation that has been happening. So, –2:29 (Not Sure) with the falling inflation with a bit of a lag time it should help household to have greater purchasing power and that should help boost especially the urban consumptions. That is what we at the first leg are going to bank on more on urban consumption. Selective parts of investments may be in highways especially but not really a broad based kind of capex revival to say.

Q: Since you were talking about monetary easing, we have got a credit policy coming up. Do you anticipate that the time is right for a rate cut and do you believe a 25 basis point rate cut would be enough or do you believe that the Reserve Bank needs to get more aggressive? That is the view of the government, that is the view of industry, but how do you read it?

A: You need to make sure that the functioning of the monetary policy works better, so that rate cut really gets translated into – transmission really is the key here. I think another 25 would help send a signal and if we have an environment where the inflation stays low for longer, then that would be helpful with the margin.

So, yes, there is probably space to another rate cut especially with inflation rates being contained. Of course there is uncertainty over monsoon and that inflation can come back on later. So, RBI would be pretty prudent in the way they cut rates.


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