NEW DELHI: No matter what, India can’t make do with 5 per cent growth ‘as the new normal’ and must do everything to achieve above 7 per cent expansion in the medium term in order to be able to deal with the socio-economic problems the economy faces, says Navneet Munot, Chief Investment Officer of SBI Mutual Fund, India’s biggest fund house.
“Preserving medium-term growth potential of above 7 per cent is not just important, but perhaps the only solution to our macro challenges and the best response to geopolitical tensions too. In a country, where a large part of the population including many northern states and large parts of rural areas have a per capita GDP of less than $1,000, we should not fall for the ‘5 per cent is the new normal’ narrative,” Munot warned.
“Otherwise not only will macro problems get exacerbated, we will invite serious challenges with regards to social tensions as well,” he cautioned.
India’s economy has been on a downward trajectory since early 2019. In June quarter, India reported the worst growth numbers among major economies at minus 23.9 per cent. Projections are that the economy may clock double-digit drop in GDP growth for this financial year.
Munot talks about a three-step strategy that the government should adopt to deal with the crisis:
Ensuring capital availability
He lauded RBI‘s efforts, which included multiple rounds of open market operations, sharp policy rate cuts and other measures, which have done most of the heavy lifting so far. The government, on its part, has complemented RBI’s efforts through moves such as credit guarantees for MSMEs.
“Sectors impacted severely by the current crisis will have to be supported. This can ensure a multiplier effect to RBI actions with liquidity getting transmitted to those in need of capital,” Munot said.
Push through structural reforms
The second step is to use the crisis as an opportunity to push through structural reforms, the top money manager said. “On this front, the government has done a commendable job so far. It has spent a good amount of political capital in pushing through important supply side reforms with the passage of farm bills and bringing about labour reforms,” Munot said.
During the monsoon session, the NDA-controlled Parliament pushed three farm bills that the government claims would get farmers the right value for their produce. It also cleared three labour codes aimed at increasing the ambit of social security and make hiring and firing more flexible.
“Execution will be key to extract maximum benefit. This will be a test of India’s cooperative federalism, as states will have to play an important role in ensuring the success of these reforms,” Munot said.
“We lack a grand design that matches our aspiration to become a $5 trillion economy, especially with regard to the financial sector. We need to address the scarcity of risk capital by incentivising domestic savings into capital markets. Institutional capacity needs to be strengthened. Instead of stepwise tinkering, we need to holistically think through the financial sector policies and infrastructure. At a time when we are fiscally limited, we must make it up through decisive reforms,” he said.
Munot’s third advice to the government is to come out with some direct stimulus as soon as possible to revive aggregate demand. “While India’s debt-to-GDP has been higher than many emerging market peers and high against our own history, the path towards debt sustainability is more nuanced than resorting to outright austerity. Sustainably improving the denominator of the ratio, i.e. a credible roadmap towards higher growth, should automatically take care of the debt burden. Once we get growth back, tax buoyancy will ensure a more comfortable fiscal position,” Munot, who manages assets worth more than Rs 4 lakh crore, said.
He said improving growth prospects can also give a fillip to government’s privatisation and asset monetisation efforts, bringing in even more money which then can be used to trim debts.