Wednesday, June 17, 2015

India chooses real growth over asset bubbles

Jun 16, 2015

INDIA'S Mr Raghuram Rajan is an outlier in Asia. While other central bankers in the region are pumping ever-more air into asset bubbles - New Zealand and South Korea further reduced interest rates last week, and Australia may be next - Mr Rajan has taken a go-slow approach. It's to his credit, and India's benefit, that he has shown such discipline.
The Reserve Bank of India governor has done his share of easing this year, most recently on June 2.

But he hasn't tried to keep up with his peers in the region.

Short-term rates in India are still 7.25 per cent compared with 5.1 per cent in China, 3.25 per cent in New Zealand and less than zero in Japan. Nor has Mr Rajan followed others in tweaking bank reserve requirements and margin-lending rules to drive up stock prices.

It's no coincidence that Mumbai shares are down 5 per cent this year, while Shanghai's are up 60 per cent.

Instead, Mr Rajan, a savvy University of Chicago economist, has been holding Indian Prime Minister Narendra Modi's feet to the fire. Mr Rajan has made more monetary stimulus contingent upon progress on the structural reforms Mr Modi promised more than a year ago when his Bharatiya Janata Party campaigned in national elections.

When he cautioned against "competitive monitoring easing" last week, Mr Rajan was letting the government know he would not be pressured by rate-slashing in other countries.

Specifically, he is prodding the government to step up infrastructure spending. He wants to make sure Mr Modi makes good on his proposed Budget, which promises a 25 per cent jump in outlays on roads, bridges and ports to increase India's competitiveness.

Mr Rajan and Mr Modi were probably buoyed by recent news that tech giant Foxconn Technology is looking at manufacturing Apple's iPhone in India.
It's an endorsement of the country's current economic stewardship, and an indication of India's broader potential as a manufacturing hub, especially given China's determination to move its production upmarket, from basic manufacturing to software design, aerospace and robotics.

But it will require bold government action, which Mr Rajan's quid pro quo strategy could help motivate.

There's plenty more Mr Rajan should do. His team has been rewriting rules to help lenders recover loans from defaulting companies, but he should accelerate those efforts.

Even after three rate cuts, India's loan growth is dwindling.

In the words of government adviser Arvind Subramanian, the "corporate sector is unusually stressed". In fact, the country's stressed assets are projected to rise to a 15-year high next year, while bank default risks are rising more than anywhere else in Asia.
To address India's inflation problem - which stems primarily from inefficiency and corruption - Mr Rajan should encourage the government to simplify taxes, cut red tape, open protected sectors, eradicate graft and liberalise land laws. Besides narrowing the gap between the rich and the poor, those steps would help attract more business from Foxconn and its global peers. Many tech companies are eyeing alternatives to China's rising labour costs, slowing growth and weak intellectual rights protections.
But the basics of Mr Rajan's strategy are entirely correct.

Unlike his peers in China, Japan and elsewhere in the region who have enabled the complacency of their governments, he has done the opposite.
In the short term, India may miss out on the excitement of rapidly growing asset bubbles. But attracting the Foxconns of the world more than makes up for it.


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