- 3 years ago
Axis Bank's Chief Economist, Neelkanth Mishra on the future of the Indian economy. #BQLive
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00:00 Hello and welcome to the NDTV Dialogues, a conversation of ideas.
00:05 And who better to discuss ideas with than Neelkanth Mishra, the Chief Economist at Axis Bank
00:11 and many other roles. He's been a key advisor to the government on crucial issues.
00:16 Also, of course, part of the Prime Minister's Economic Advisory Council and just taken over in his new role
00:21 as part-time chairman of Aadhaar. So Neelkanth Mishra, thank you for taking time out from this very busy schedule to join us.
00:28 Thank you for inviting me. -Now, I'll ask you about Aadhaar six months down the line. But tonight, the big focus is
00:33 really about looking ahead for India, our economic vision, our growth vision
00:39 and why when everyone describes India as the growth story of the decade, this is India's century, how do you actually break that down?
00:47 Why do you think India is uniquely poised at this moment in time? -So, the first I would say that extending
00:54 ourselves to saying that this is India's century is very dangerous.
00:58 We have to remember that we have to get rich before we grow old. Our average age will cross 40 by 2053.
01:07 So we have a narrow window of about 30 years where we have to max out on growth. Otherwise we'll be like China or
01:12 Thailand which are growing old before they get rich. Growth also is not a given.
01:18 So you have to work hard for it. So, when I see some of this lazy commentary going on that this is the next
01:25 100 years are India's and all that, I think that is very dangerous because that makes people complacent.
01:31 We have to remember that even China every 5, 6, 7 years was undertaking very risky, very tough changes and we have to keep doing that.
01:40 Now, why are the next 5, 7 years looking very good? The first is that our real estate cycle is turning.
01:50 See, in a country like India which is very young, the number of households is expanding at 2.4% a year.
01:56 Average size of a house has to grow. The quality of a house has to improve. We've had a 10-year downturn in housing construction.
02:04 And it should have recovered in 2016-17 but then we had RERA and demonetization.
02:11 2018, one large NBFC collapse. 2020, COVID hit. What we are seeing now is a cycle which has been delayed by 6 years.
02:20 And you will see very strong trends right now in even independent home builders building their own houses.
02:26 We are also seeing substantial improvements in India's services exports. So, from doing very brute force Y2K work in IT,
02:38 we have transitioned to writing software as a service, very high-end software. And I think that trend is very exciting.
02:45 But non-IT work is also accelerating. So, we are running semiconductor fabs from India.
02:52 We are crunching data for oil drilling companies. We are running global procurement for US retailers sitting in India.
03:00 40-45% of employees for global consulting firms, strategy consulting firms are sitting in India.
03:07 So, this itself is, I think, a very important factor. And this would not have been possible 20 years back but now is.
03:14 A country the size of India needs many growth drivers. The third growth driver, I think, is that we had to go through a 10-year process of deleveraging.
03:26 See, in finance, we discuss about a balance sheet. Balance sheet is nothing but the state of a person.
03:31 So, if say I have already run a marathon, can I run another one? And that's very hard.
03:37 So, in 2012, our growth looked very strong. But anyone who looked at our balance sheet, the fact that the companies had taken on a lot of debt,
03:47 the banks had over-leveraged themselves, the country was borrowing too much from outside to fund its growth, and it was unsustainable.
03:56 In the last 10 years, we have cleaned all that up. So, this is a fresh body now ready to run.
04:02 There are several other aspects to it like improvement in macro infrastructure, national highways, better broadband connectivity.
04:11 We have much better availability of electricity. The distribution system is starting to get cleaned up.
04:20 You know, the DISCOMs, the payment or the payables, that is the funds that they have not paid yet,
04:28 is actually fallen very sharply because of some reforms undertaken, smart metering. So, there are many fronts on which India has changed, transformed.
04:37 And one last point and the most important one is that when you think about a society,
04:43 I mean, economy, the balance of power between the state and the private sector is very important.
04:49 Yes. So, if the state starts to feel threatened by the private sector's growth,
04:54 or individuals in the state start feeling threatened by or jealous of the growth of the private sector,
05:00 they start controlling too much and that slows down the dynamism. This is what is happening in China right now.
05:06 In India, we are seeing the reverse of that. The state is willingly ceding space to the private sector,
05:12 realizing that if India has to grow, then the private sector has to grow.
05:18 And therefore, the state is taking a much more supportive role. There are still glitches.
05:24 There are still things that you wish would be changed faster. But I think there is enough there for us to grow at 7% plus in real terms over the next five years.
05:33 It's interesting that point you make because in India, that's always been a pain point, this whole issue of suit, boot in the private sector.
05:40 And, you know, it goes from perhaps the private sector being vilified in some sense to the private sector being seen as a key job driver
05:47 and really part of India's growth story. How do you think that's going to play out as that rhetoric comes up?
05:53 And also the big focus because, of course, the contradiction that India now on its way to being the third largest economy,
05:58 but also very strong on welfare schemes and focusing on that. We've seen the Prime Minister Avast Yojana,
06:03 which will bring about huge change in the lives of poor people. How much do you think the success in changing India's multidimensional poverty index,
06:12 lifting a record number of people out of abject poverty is something which is a key political point?
06:19 And then the worry about, you know, is one sector being favoured? Are the rich getting at the cost of the poor?
06:27 It's a very complex question, but a very important one. I must first say that we are a democracy.
06:35 We cannot go down the path that China did. So China willingly created wealth and income inequality by allowing some entrepreneurs to flourish
06:48 and looking the other way, active financial repression and so on and so forth.
06:53 We cannot do that because if that happens, then government loses the next election.
06:58 And then the whole process then, because then the winners in the election then interpret the verdict as, oh, you know,
07:05 we have to go the other way and then we start regressing again. So it's very important to balance both.
07:13 So, but we have to be very clear that when we are thinking about the poor, are we giving them fish to eat or are we teaching them to fish?
07:22 Right. And I think the approach where you make them capable by giving them access to roads, electricity, data and whatever needed skills
07:34 and in parallel create, allow the private sector to create pools of capital, which then can absorb this labour.
07:47 I think having both of them happening at the same time is the right one. And we will make mistakes,
07:53 but I think I see enough progress happening on both fronts right now.
08:00 The reason why you still need large companies, while I know politically that commentary is somewhat divisive,
08:11 is that increasingly you have to compete with global firms. In the world, in most sectors,
08:20 unless you are part of these value chains and to be part of global value chains, you really need,
08:26 other than maybe the Mittelstand in Germany, everywhere, these are large companies with large R&D pools,
08:32 with heft that they can use against customers, against suppliers.
08:37 If you have very small companies competing against, like a textile company with 2000 workers,
08:43 competing against a Chinese company with 50,000 workers or a Vietnamese company with 80,000 workers,
08:49 how are they going to compete? So you need these large pools of capital and we need to create the social context,
08:57 I would say the social understanding that both are needed at the same time.
09:02 And that's a delicate balancing act, which is why perhaps we are not going to grow at 9-10%,
09:07 but we can grow at 7% if we do both. -And also, the Finance Minister just said today that political stability
09:15 is key for India becoming the third largest economy. Do you think that is something which is key?
09:21 And again, I think that's part sometimes of the rhetoric around markets, that markets will react a certain way,
09:28 certain decisions are taken and markets are somehow anti-welfare reforms. Do you think that narrative is true,
09:34 that political stability or the same government is key for India to continue on this reforms path?
09:39 I definitely think that macroeconomic stability is required. So what do we mean by macroeconomic stability?
09:46 Suppose I am setting up a factory. Now, if I cannot see beyond, say, two years,
09:54 that I don't expect a certain level of inflation. See, high and volatile inflation is very disturbing.
10:01 High and volatile or very volatile exchange rates, very volatile interest rates.
10:06 If I have to set up a factory, I have to, I mean, I'll do three years of capex and then over the next 7-10 years,
10:13 it will return back my investment. I need to have a reasonable visibility over the next 10-12 years before I actually invest.
10:20 If I don't have that, I won't invest. So the longer, in fact, one entrepreneur recently told me that,
10:26 the moment you see someone investing for five years, you know he's won.
10:30 Because there are very few people who can invest over that time period.
10:34 To do that, you need to have visibility, you need to have stability.
10:37 And I think the macroeconomic stability, the focus on fiscal discipline, the focus on making sure that inflation is within the range,
10:48 we have struggled with some of the food prices going up and down because of tomatoes and pulses and all that.
10:52 But by and large, the core inflation is now starting to settle down.
10:56 And so that is one of the reasons why not just Indian entrepreneurs,
11:02 but global corporates are also looking at India in a very different light,
11:07 because we are no longer a part of the fragile five.
11:10 If any global disruption, like US yields have gone up, if it was the India of 2000 or India of 2005 or India of 2015,
11:22 by now our markets would have been extraordinarily volatile. But that is not happening.
11:27 So that macroeconomic stability, I think, is an absolutely essential feature for the economy to grow over the medium term.
11:35 Is political stability required to deliver macroeconomic stability? I think to some extent, yes.
11:40 Because some of what we have seen at the state level in the recent quarters, in recent years,
11:48 this culture of freebies, this culture of 100 units of free power, in fact, this is a question which is worth asking.
11:56 In India, the household rate of power price is the lowest in the world.
12:04 The industrial power rates are the highest in the world. Right.
12:09 How do you expect industry to be able to compete globally and therefore produce?
12:16 And when they produce, of course, they create jobs. So the question we have to ask ourselves is,
12:20 is it better to give free power to people or is it better to give them jobs so that they can pay for it themselves?
12:26 And I think bringing down industrial power tariffs and reducing the freebies will create jobs,
12:33 because then these companies can compete globally. And so somehow that narrative has been lost at some of the states.
12:40 The risk may be that because at the state level, the deficits are capped.
12:46 Right. So it's always a quality of expenditure issue instead of a quantity of expenditure issue.
12:50 So if you are spending. It's like old pension versus new pension. Exactly.
12:53 So if you are spending on old pension scheme, out of 140 crore people, you are investing in the households of 2 crore people.
13:02 Right. It is made the narrative is, oh, my God, you know, we have to guarantee pensions.
13:06 But what about the rest of the people? Right. There are I mean, if you say take an average household size of five,
13:12 these two crore workers in state and central and municipal governments will be supporting 10 crore people.
13:17 What about the remaining 130 crore people? Right. Who guarantees their pension?
13:21 And the fact that for some of the states, interest costs, salary cost of government employees and pension cost of government employees is already 60, 65 percent of total expenditure
13:31 means that the health care of the poor, the education of the poor, the skilling of the poor,
13:38 the provision of basic facilities of the poor is missing because you are ending up paying a very small fraction of the households.
13:45 So but it's still at a state level, a quality of expenditure problem, meaning that by paying so much in salaries and pensions to a very small fraction of the population,
13:54 you are you are spending all your resources on inappropriate things and you're not investing enough on health care, education, roads, electricity and so on.
14:05 At the central level, there is no gap. So if these policies were to start getting implemented at the central level,
14:11 then we will come back to in three to five years into the rupee being volatile, the current account deficit going out of control.
14:20 Do you find because, of course, you are from Bihar and you have talked about the fact that just seeing the transformation in your home district has also reflected the much larger transformation you see in India.
14:30 Now, in the sense, Bihar has now come out with details of a caste survey which shows that over 60 percent are actually of OBC, OBCs,
14:38 and are saying the whole now political narrative of the opposition that they should be now looking at how much you are of the population.
14:46 It should be proportional representation when you're looking at various reservations. How do you think that this actually plays out when you're looking at a progressive economy or economy looking forward?
14:56 How do we reflect these realities also of India today and the caste realities is one very prevalent, especially in states like UP, Bihar and many others in India.
15:08 The share of population and the benefit should be proportional is very dangerous.
15:13 I think it very quickly can descend into majoritarianism or when the next delimitation exercise happens,
15:23 then should it not be in proportion of population if it's applying in one aspect, then why should it be the other?
15:29 But frankly, I understand economics. I struggle to understand Indian economics, so I will not venture into domains which I am not very comfortable with.
15:37 Or I'm not an expert on. For the markets generally, these are not important issues.
15:44 And the reason is that if India has say, give or take 50-55 crore workers, most of these come down to, you know, 3-4-5 percent changes for that 2 crore employee base.
15:58 And so it's like, you know, a fraction of a percent point of the workforce who will have a job or will not have a job and the quality of that person and all that.
16:10 So for markets, this is generally a wash. For economic forecasting also, I don't think this is that important.
16:17 So I don't pay too much attention to it other than reading newspaper headlines.
16:21 When you come to that point of the Indian markets and really the performance of Indian markets over the last five years has really outperformed many other major markets.
16:30 Do you think that now for investors, and you've seen, you've talked about choppy times, but we've also seen the recent high where you've seen many small investors thinking that we must, this is the way to multiply wealth.
16:40 What would be your forecast for the Indian markets and do you think they have come of the maturity or age needed that you would be happy with, for instance?
16:48 I think we are getting there. I think there is a long way to go.
16:53 The first big change is that our total fertility rate has fallen below 2.1. As you know, 2.1 is the sustenance rate.
17:01 Because, you know, hamdo hamdare do and then there is a death rate. So you add some of that.
17:07 So if you fall below 2.1, over the medium term, your population will start to fall. It doesn't start falling immediately.
17:13 In the first 20-25 years, your dependency ratio falls. What is the dependency ratio? It is the number of consumers per producer.
17:22 So the young age dependency, because people are having fewer kids, they have more time to do economically productive work.
17:28 They also have more money to save for their own future or the fewer kids they have, their education.
17:35 Japan hit this phase in the 70s and suddenly Japanese savings started shooting up.
17:40 When you look at China in the 90s, of course, one child policy accelerated that process, but they also went through that process.
17:48 So I think the next 15-20 years we will see a surge in financial savings.
17:52 First, savings and because the new generation is less enamored of gold and land and so on and so forth, they are likely to save more in financial products.
18:00 It is interesting you are saying that because the latest RBI data has pointed to a fall in household savings,
18:05 which is being looked at by the opposition as a sign of the growing economic inequality in India.
18:10 I wish people spent more time looking at the data than just looking at headlines.
18:16 When you look at this number, the decline has been in net household savings.
18:21 So what is net household savings? So there is gross household savings and then you subtract from that how much the households are borrowing.
18:27 Now the gross household savings has not fallen. So it has gone from 11.2% to 10.8%.
18:33 So people who have surpluses, like say if X percent of my income is saved, it is still getting saved.
18:39 What has happened though is that because corporates are deleveraging, as I was saying,
18:45 this is a very fresh body ready to run the next 10 years, the corporates have not been borrowing.
18:50 So the banks are packaging these loans into the real estate sector like mortgages or giving unsecured loans.
18:57 Some of these loans, see India's households on a debt to GDP ratio basis,
19:02 household debt to GDP ratio in India is among the lowest in the world.
19:07 And one of the reasons was that the ticket size of loans that Indian households need is too small for banks to lend profitably
19:16 because the evaluation cost itself used to be too high. Now with all of this data availability with UPI and digital data
19:24 and frameworks like the OSEN framework, the account aggregator model where if I need an unsecured loan and you are a bank,
19:32 I go to you, you say, OK, fine, give me access to all your bank accounts. And then I say, OK, I give my consent.
19:39 The account aggregator opens up all my data digitally to you. Within minutes, within seconds sometimes,
19:44 you can decide whether I am credit worthy or not. This was not possible earlier.
19:48 Now this is allowing people to spend because the whole category, a new category of spending is coming up.
19:57 So what is happening is that the household liabilities are also going up. So net financial savings is not the right way to look at it.
20:07 OK. Right. So because when I'm looking at gross savings, then the gross saver is deciding whether to put into equities,
20:14 to put into fixed deposits, to put into bond market or do whatever.
20:19 So so from that perspective, I think the next 15, 20 years, we are seeing about 30,
20:25 35 billion dollars of what I call unintended equity flows or flows into equity markets.
20:31 So like think about the EPFO, Provident Fund. Employment numbers are going up.
20:37 Wages are going up. They have to with some inflation. There is now seven to eight billion dollars every year going into NIFTY,
20:45 NIFTY ETFs through the Provident Fund. Fifteen percent of all incremental flows go into NIFTY ETFs.
20:52 You look at insurance penetration, insurance penetration is rising. So premiums are growing.
20:56 And then under IRDA norms, some part of that premium has to be deployed by the insurance company into equity markets.
21:03 You have 15,000 crores a month of systematic investment plans.
21:07 It's annualized to one like 80,000 crores. Twenty two billion dollars is is coming into equity.
21:13 You add all of that is 30, 35 billion dollars getting into equity markets.
21:18 Now, this is why India's P multiples, the valuation multiples are now very stretched.
21:24 Yes. So so market returns are, I think, going to be subdued, at least in the equity markets.
21:33 And I think the primary driver of that is that global equity markets, I think, are going to be very volatile in the next year or two.
21:40 So just look, because you made that point of China. Let's look at the India versus China comparison.
21:44 That's often done again. That's an easy narrative. But in a sense, globally,
21:48 if China's economic model is now crashing or going downwards, India is growing.
21:54 Is that something which is actually counter each other?
21:59 Or are we looking at a global economy which will be hit if China's economy goes down and India is impacted by that, too?
22:05 So the biggest concern right now is that China, I think, will grow slowly.
22:10 Right. I don't think China will collapse because, you know, I hope they don't.
22:15 Right. Because if they do, then there's a problem for everyone. Because, you know, it's a tightly controlled model.
22:20 Almost everything is state controlled, state owned. The state is, in fact, further intensified its reach.
22:27 So China, instead of people expecting 5 percent growth, I think will grow at 2 percent.
22:32 But it's not going to crumble and collapse. Right. The problem in the next 12, 18 months is going to be the US.
22:42 They've also got an election coming up. That makes it even more interesting.
22:47 Everyone thought that there would be a recession this year. There was no recession.
22:52 So now suddenly people have gone into the other extreme of euphoria and saying, oh, soft landing,
22:57 that they will be able to bring down inflation without causing a recession.
23:02 But this was achieved by a significant expansion in fiscal deficit.
23:09 So what happens is in a year where your fiscal deficit was supposed to be, say, 5 percent,
23:15 and you do 8.5 or 9 percent fiscal deficit, this 3.5, 4 percent expansion is extra spending.
23:22 So it supports the economy. Now, if the next year they keep it at 8.5, 9 percent,
23:28 there is no further stimulus and the high interest rates are going to. So there are many, many fault lines in the US economy right now,
23:34 in the real estate market, in the commercial real estate market. A lot of the loans haven't even rolled over.
23:40 You know, if you take a fresh mortgage in the US today, your rate will be 7.9 percent.
23:47 Their average effective rate is 3.6 because everyone takes fixed rate mortgages in the US.
23:52 So the impact of the rate increases hasn't even shown up. So I think as that starts to happen from the middle of next year,
24:01 the US is where we need to be very worried. India is at about 3.5 trillion dollars,
24:08 is give or take 3.4, 3.5 percent of the global economy. If we grow at, say, 10, 11 percent nominal,
24:16 we are going to add, you know, maybe 30, 40 basis points to overall global growth.
24:25 While that is a very large part of incremental global GDP, but it is not enough to move the global GDP.
24:32 But if the US slows down sharply, then I think the whole economy will slow down, the global economy will slow down.
24:39 You talked about the fact that the next five to seven years is perhaps where India's growth is going to be the big focus,
24:46 perhaps the big global growth story as well. But just looking at what you think would perhaps be some of the challenges,
24:51 because the point made by some economists is what about looking at the per capita income and also unemployment.
24:57 You've got this huge dividend of the highest population in the world, the highest young population in the world.
25:02 But what happens if employment is not matching those aspirations?
25:07 So you asked about risks, right? I think there are risks. We are still dependent on imported energy.
25:16 See, to a large extent, GDP growth is almost directly linked to consumption of dense forms of energy.
25:26 And so when global energy prices shoot up, so if something bad happens, right, in a downturn.
25:32 So right now we saw a surge in oil prices, but because of this fear of recession, again, oil prices are coming down now.
25:37 So some relief there. But if, say, there is another supply disruption, some again, some war breaks out somewhere,
25:44 then I think there's a major headwind for India. We are still dependent.
25:47 Now, it will take us 10, 15 years to solve that problem, where maybe more, where we become less dependent on imported energy.
25:54 But right now, that's a big vulnerability. The second is that we will become current account surplus,
26:00 I think, at some point because of all the factors I mentioned, demographics and services, exports and all that.
26:07 But we are still going to be affected by global financial market volatility.
26:13 So the US goes into a recession and dollar rates or dollar availability shrinks.
26:19 Maybe the RBI will be forced to raise rates again. And that will slow down the Indian economy as well.
26:24 So those are vulnerabilities that I think we need to be conscious of. Nothing is given.
26:29 Will sustained high youth unemployment be socially disruptive?
26:37 You know, in markets. And economically. Yeah. So let's think about it this way.
26:44 The 7 percent growth that I'm thinking of, I would split it between three parts.
26:48 First is labor input growth of 1 percent. Productivity growth of 2 percent, so 3 percent.
26:55 And 4 percent capital growth, capital formation, which is like building a house, building a factory, building bridges.
27:01 Now, so labor input growth is only 1 percent. See, in the 90s it used to be 2 percent.
27:06 If we are able to improve our worker participation ratio, see, the problem in India is that
27:13 a very large number of workers are not even part of the workforce. Right.
27:17 And while I think our female labor force participation rate that you see in some of these comparisons are inappropriate because definitions are wrong.
27:25 Even after you correct for definitions, we are very far away from Vietnam, which is at 70 percent of the women in the workforce.
27:31 And the COVID impact as well on India. And there is a lot of underemployment in agriculture.
27:37 You don't need 20 crore people in agriculture. So you need only 10 crore people, 8 crore people in agriculture.
27:42 So if over the next 10 years you want to get that underemployment in agriculture down as well, then you need another 10, 12 crore jobs.
27:52 I don't think we can create those many. If we can, they'll be growing at 14 percent.
27:56 To grow at 7 percent, if we just absorb the fresh workforce, which is slightly better employed, I think that is enough for economic growth.
28:04 Just final thoughts tonight, Neelkanth, really, and looking back to when you wrote first,
28:09 the silent transformation, which came some years after the reforms. But looking at and perhaps going back to the Bihar,
28:15 you came from what to you is the biggest indicator on the micro level of the macro change that you think India is now seeing?
28:23 I think ambition and aspiration. You know, if there are 140 space startups in India,
28:32 when I look at the approach of youngsters coming out of college, you know, when I graduated from engineering,
28:42 I had a badge of 22. -IIT Kanpur gold medalist. -So in my computer science badge, 18 out of 22 went abroad.
28:50 Most of them have US citizenship. I'm not saying I'm not grudging that because a lot of their expertise is now available to us.
28:56 So I think it has been in the longer term very useful for us. Today, no one goes abroad.
29:03 Everyone wants to do a startup in India. And I think this whole energy, this ambition, this willingness to,
29:11 you know, redo things, do things better. And the fact that this is happening, you know, you go to small towns now,
29:19 right, the malls that are available, the changing aspirations, the ability to skill, the availability of information.
29:27 I think it is India in many ways is a very giant organic being.
29:33 I think we do it in justice by attributing step jumps or some many big legal changes. This is why it's happening.
29:41 Think about the bureaucracy, right? The bureaucracy that could take big decisions in the 90s had only seen the license raj.
29:51 And they had seen that they were very powerful, but the economy was not doing well.
29:55 They were not convinced that opening up would be good because they had a very deep distrust of the private sector,
30:00 that these guys are corrupt individuals. They only violate rules. The bureaucrats who are now joint secretaries or directors,
30:09 the 35 to 45 year olds, all have seen dramatic changes in the villages.
30:15 I mean, all the things that I have seen and you have seen, they have seen that.
30:19 They have seen some of them are married to private sector people. Their cousins have done well.
30:25 That deep distrust of entrepreneurship or free markets is no longer there.
30:31 And I think that's a very deep rooted change. It's going to be very hard to reverse it.
30:35 And I think that ambition, aspiration and acceptance of what drives economic growth is in my view, the strongest, the biggest strength for India.
30:45 Neelkanth Mishra, thank you so much for taking the time to talk to us. It was wonderful to have you on the Dialogues. Thank you.
30:51 Thank you so much.
30:52 Thank you.
30:53 Thank you.
30:54 Thank you.
30:55 Thank you.
30:57 Thank you.
30:58 (typewriter clacking)
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