In a conversation with The Indian Express National Editor Shaji Vikraman, Credit Suisse India Equity Strategist Neelkanth Mishra explains the slowdown and why he thinks GST won’t solve the problem immediately, impact of demonetisation, and the way forward — to the extent that the current ‘fog’ will let him see.
Neelkanth Mishra, Managing Director and India Equity Strategist at Credit Suisse, is among the best equity analysts in India. He has been an Advisor to government-appointed Committees such as the RNR Committee on GST and the FRBM Review Committee. He is also a columnist on economic affairs at The Indian Express.
Edited excerpts from the conversation:
Is the economic slowdown temporary or structural? Is it rhetoric or is there a certain reality on the ground?
I have called India a house under renovation — if you want to redo the interiors of a place, you have to break things down. While you are doing that, it will be noisy, dirty and uncomfortable. This is what the economy is right now. Many changes, like GST, RERA or other reforms, are undoubtedly good in the medium term, but in the near term, they are causing discomfort. Like anyone who’s ever redone the interiors of their house, around the middle, you start wondering, was it really necessary? Weren’t we happier earlier? We are in that phase right now.
Once GST has stabilised, around March or June next year, will we go back to 8% growth? I don’t think so. I think we’re yet to address many of the much deeper issues we suffer from. Agriculture is going through great pain. This is something we should have addressed 50 years ago. We have just too many people in agriculture. The first time someone observed this was in 1881! The first India Famine Commission said that India’s man-to-land ratio is 10 times that of Britain — this after 100 years of colonial rule and de-industrialisation.
Nearly half our workforce is still there (in agriculture). For the longest time, given democratic pressures, it was necessary to provide lots of subsidies to that sector. But if you allocate capital inefficiently to one side of the economy, you cause inflation.
In 1951, we had 10 crore people in agriculture. In 2011, we had 26 crore people. Something that’s grown at 2%-3% per year, how is it sustaining people? Because of sustained food price increases, the income generation growth in agriculture was still in double digits. It wasn’t good enough for people to feel happy. But it wasn’t bad enough for them to say, this is not viable, I’ll leave it.
But that is becoming very hard now. We are now a food surplus economy. Other than oilseeds where we can’t compete with Malaysian oil plantations, in almost every category, we generate surpluses. So, whether the government gives high MSPs or not, we won’t get high food price increases. In the last four years, agriculture has been growing in single digits. This year, I think it will be less than five per cent.
If half your population is struggling for an income, how can you grow? That’s a huge structural problem.
The next biggest employer is construction. Sixty per cent of construction jobs are in rural housing. We think of construction mainly as urban skyscrapers but the fact is, most is rural housing. But if a farmer is not feeling happy about his income, why will he add a room to his house? Or go from a kuchcha house to a pucca house? He will not.
These issues are unaddressed. You have people in agriculture who don’t know what they’re going to do. You have the urban real estate market which is very slow. On the investment side, where private investment is allowed, like in power generation, metals, steel, you already have too much capacity. No one wants to invest. Where we lack capacity — urban transportation, water, sanitation, power distribution — you need to free these areas up.
People assume growth during 2003-08 happened automatically — I don’t think so. Driving it was a massive investment in telecom, freeing productivity because of TRAI and other reforms, the National Highway Development Project (NHDP) creating growth, power generation after the Electricity Act of 2003.
Where are those massive freeing-ups now? Till we see that, for example, till we see some state government doing PPPs in sewerage or sanitation, that investment is not happening.
That is why, even after GST stabilises, I don’t expect growth to do very well.
Would we have been better off without demonetisation?
How much disruption did demonetisation really cause? I think India has a problem of a weak state. I’ve often been amazed at my friends, doctors, traders, complaining, “My God, we have to pay tax!” I’m like, “Boss, yes! That’s what in a civil society, you have to do!” Earlier, I also used to think, kya fayda hai, why do all this? But then, if we all start thinking traffic rules are pointless and jump traffic lights, I don’t think the government can hire enough police to keep law and order. So, this (demonetisation) was a cultural thing — it was the state making its presence felt.
Could it have been done better? Absolutely. But I don’t think there’s been lasting damage. If someone has slowed down activity because they were dealing in cash and are now afraid to, I think that is a cost worth bearing. If they’re a dealer with capital saying, “Oh God, if I go formal now, they’ll ask, ‘You showed 25 lakh revenue last year, why are you showing 10 crore now?’,” I think it is a cost worth bearing.
Eventually, they’re sitting on capital. They will have to come back to the market.
So, when could we see average growth of, say, seven per cent?
I would say around 2020-21.
Isn’t that a political risk?
I don’t think so. I’d say economic growth does not have that much of a bearing on the decision to vote. How many people understand GDP? Maybe the top five per cent. GDP doesn’t matter. What matters is the feelgood, about yourself and what’s happening around you. From that perspective, whether GDP is seven per cent or six and a half per cent, it doesn’t matter. We should disassociate politics from economics.
But how are things going to play out in the next one year?
A phrase I’ve started using right now is that there is a dense fog. So, it’s not only that we have a house under renovation but also that it’s hard to see, whether fiscally or on inflation or the banking system.
Let’s start with the fiscal. The total taxes subsumed under GST were about Rs 10.6 trillion. It won’t be the same every month. By January-February, the government will start getting clarity on how it is doing fiscally. By March-April, most corporates would have settled around GST. Right now, even very efficient large companies, their officers are sitting up all night, uploading figures into GST, so who’s thinking of capex?
But by March-April, people will have understood how to manage this — and then, they will start doing new business. They will also understand which competitor has died out and who’s been strengthened. By March-April, you will see a pick-up in growth.
But some of the biggest groups, in infrastructure, etc., are in trouble. Where are the entrepreneurs for big projects?
In 1998, the NHDP was launched. When they came out with their balance sheet requirement, only four companies qualified — even they said, don’t give us 200 km stretches, give us 50 km stretches, we can’t do more than that. Now, people do 1,000-2,000 km bids. So, there is a learning curve.
New business groups come up. Old business groups die. We take on new responsibilities and we grow into them. If there is an opportunity, there’s a human instinct to take risks. Of course it’s an important problem that India lacks equity. But when I see entrepreneurs in any industry, any small town, their ambition levels, I don’t worry. Once the big disruptions are over, I think we will see a decent cycle.
What about key sectors for reforms? And the government’s ability to provide manufacturing jobs, particularly with the arrival of artificial intelligence?
First, jobs. I don’t think you need 26 crore people in agriculture. That needs to drop to 7 or 8 crore. Even if that happens over the next 20 years, we’re still talking about 70 lakh people exiting agriculture and needing new jobs. And they’ll be of a 25+ age profile, which is very hard to re-skill. There is a problem.
But I don’t see the problem as AI, 3D manufacturing, automation or robots. Think of the ways large numbers of jobs get created — like housing. India has a big housing shortage. This can be a big job creator, both in rural and urban India. The government knows this. But pushing this from Delhi alone is not good enough.
Isn’t the fact that states have to be on board a big inhibitor?
There are two issues here. First, prices are too high. Effectively, the only people who do buy houses for investment are those with black money. That demand is slowing sharply. Price adjustments need to happen. Without that, investors are out, genuine buyers won’t come.
But in the villages, there is a huge opportunity. The Pradhan Mantri Gramin Awas Yojana is very well-designed to avoid leakage. But perhaps, it is also too well-designed. There is no incentive to push it. Earlier, if the sarpanch under the Indira Awas Yojana was getting a 20% cut, he was getting enough houses built in his village to get the money. Now, he’s not getting that. So, he’s not pushing the scheme. So, you’re left with the buyer, a BPL family, which may not be able to get all the approvals themselves. It’s a learning curve now.
I think the first step was, the government wanted to clean this up. They’ve cleaned it up. Now, the next step has to be to accelerate the process. You have to get rural housing right for job creation. Odisha has done a good job there.
The second area is food processing. I heard recently that in Africa, the tomato puree market is dominated by the Chinese. Here we are, across the pond, with our farmers in a downcycle, throwing tomatoes on the side of the road! We have many food surpluses. We are also exceptionally well-endowed with sunlight, fertile soil, rain. And cheap labour — we should be killing it in agriculture! Agriculture itself can create jobs, as can food processing. And these don’t need migration.
I think small appliances too will grow, particularly as electrification increases. Until 2011, around one-third of our households didn’t have wires going into their houses. Now, most do. Many states have seen a dramatic improvement in electrification. My home state of Bihar, till 2011, had only 16% houses with wiring. Now, that’s 60%. So earlier, there was no need to buy a mixer-grinder because bijli hi nahin hai, toh what will you do with that? Now, you have electricity. Now, you will need that mixer-grinder. Who’s going to make that? Not just the Chinese.
Look at the job creation in footwear and textiles. It’s all pre-fabricated now. I’m sure Salman Khan doesn’t know this but you go to any small town, you’ll see posters of him advertising some little-known brand! I’m sure the same will happen with electrical appliances.
I think we have huge job creators.
How will the government address massive numbers being pushed out of agriculture willy-nilly though?
That is a huge challenge. But you cannot deny that there is a vicious cycle we need to break out of. If you want their votes, you give high food prices. But the side effect of that medicine is terrible. This is why we’ve always had high inflation since independence. We’ve always had a high fiscal deficit. This impacted the RBI’s monetisation, with resultant currency crises owing to the RBI having to print more money.
At least now, instinctively, we’ve gone in the right direction by saying you cannot have high food prices. Because of that, we now have a surfeit of financial savings, a much lower current account deficit, currency stability — all the macro stability is coming from there.
Now, to accommodate the millions who will have to exit agriculture, the skilling process is very important. Why would an individual in a village skill himself in plumbing or carpentry if he is ok? Skilling will help. This is not to say there won’t be existential pain over exiting agriculture or hunger, etc. These issues will certainly need to be addressed. But artificially inflating food prices is not the way.
I think it’s much more helpful if the government were to make it easier to register companies, make people aware of food processing, etc.
Will we see a transformation of banks soon? How do you see corporate India changing?
I’ll hide myself behind the fog again — there are lots of uncertainties. But I see signs of hope. On PSU banks, they were in a vicious cycle. Banks make money when they lend. If they have less capital, they can’t lend. Their costs are fixed. So, your operational profitability is reduced, even without bad loans. As you keep making losses, you keep eroding your capital. So, your income keeps going down. Your revenue goes flat. And because the market sees this happening, you can’t raise money from the market itself.
This one-time capitalisation was needed. This vicious cycle has been stemmed. This should be accompanied by banking reforms, so the problem doesn’t recur.
Over the last 25 years, we’ve seen repeated infusions of capital.
Right. But in the markets, we’re taught to be hopeful. I do think there is a real desire to clean things up.
Give us a realistic assessment of the next fiscal as someone who, being in equity, puts his money where his mouth is.
We are trying to solve some very deep-rooted problems. One of these is that the tax to GDP ratio in India is one of the lowest in the world. And we have a government which is too small.
I’ll tell you an anecdote — 18 lakh tax cases were sent out. And there were 2,000 tax officers to scrutinise them. It’s just not realistic. That’s why they go after the smaller problems and often let go of the bigger cases which require more effort. This perversity is happening because your tax to GDP is too low and we need to solve it.
I think steps like GST are important to get that going. We are trying to solve very big problems. The effects won’t be so clear maybe in 10-12 months. But 18-36 months later, I think we will be in a much better economy.