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India needs to fix many things for real turning point, says Harvard Economist

Monday, October 10, 2016

With a healthy growth rate, India stands out among emerging economies, but the country needs more private investments and has to fix many others things to see a "real turning point", according to noted Harvard economist Gita Gopinath. Stating that it would be really difficult to predict what would happen in the near term, she said that given a lot of positive steps that have been taken, the turnaround might happen sooner than later.

"Given that the global growth is so weak and most other emerging economies have been hit by commodity prices, in comparison, there is substance in the fact that India stands out," Gopinath told PTI in an interview. "It (India) is growing at a healthy rate of (over) 7%, its macro economic indicators are good and the recent announcements, especially the GST, were very well received internationally." According to her, people think there is some real progress happening here, but obviously this is not enough.

"There are still many many things that need to be fixed like some of the big announcements like Skill India, Make in India have to show results," she noted. "Private investments, what I mean is (by) domestic investors, still has to grow. Investment rates in India still haven't recovered. When that happens, then we will have a real turning point." Gopinath, the John Zwaanstra Professor of International Studies and of Economics at Harvard University, was a Co-Chair of the just-concluded India Economic Summit. The Reserve Bank of India (RBI) has pegged the country's GVA (Gross Value Added) growth at 7.6% for the current financial year ending March 2017 and 7.9% for the next fiscal. Earlier this month, the International Monetary Fund (IMF) projected a growth rate of 7.6% for India in 2016 and 2017.

The multilateral lender also said the government should continue reforming its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education and healthcare. According to Gopinath, Skill India and Make in India have to "really generate better outcomes". "I don't know how easy is it to make that happen. It is not something that will happen overnight," she said striking a note of caution. Emphasising that Goods and Services Tax (GST) finally happening is a "very good sign", Gopinath said the taxation regime will help companies save costs which they otherwise would incur whenever they cross borders. "The more longer term effect of where to locate production, where to locate sales and all of that will take some more time. There could well be rather a quick effect on revenue collection because a good thing about GST is it is a self-enforcing imposing mechanism of tax collection, unlike all the other taxes we have," she added.

Asked whether a more dovish monetary policy is advised, Gopinath replied in the negative.      "No, I guess I am one of those people who thought (Raghuram) Rajan's monetary policy was perfectly good one. Obviously, you have to revisit decisions with the data. My hope is that the Monetary Policy Committee (MPC) will do that," she said.

"While RBI has been cutting rates over the last year and a half, the transmission has not been very strong. So, I don't know whether another 25-basis point cut will have a big effect," she said. "I don't know... Unless they find a way to make sure that this actually passes through banks and banks actually passes that to customers. Whether that will happen is still in doubt because of the bad asset problem of the banking sector." In response to a query on the debate about India's GDP calculation, she said it is true that the debate doesn't die down.

"GVA is another way of constructing it... Some of the issues were there probably even before this GDP construction and it is not as if now things have got much worse or anything of that kind. It became more salient recently," she said.

"My take though is that IMF has signed off on the numbers and the rest of the world is fine with the numbers. The question is everybody is looking at the change, just look at the direction of the change." On whether the debate over GDP numbers is a concern in the context of India being seen as a bright spot, Gopinath said, "I think even if it (the debate) is correct and how badly rest of the world is doing, India will still stay as a bright spot."

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