'One should not expect an immediate boost to the economy'

The structural reforms that the new government is putting in place will take up to 18 months to bear fruit, says Sanjeev Sanyal (below left), global strategist, Deutsche Bank. In an interview with Samie Modak, Sanyal says PM Modi might bring in radical tax reforms to address the fiscal challenge. Excerpts:

How are you reading the strong mandate given by the electorate to the new government?

Prime Minister Narendra Modi has not only got a clear mandate, he is the first PM to have fought an election on an unapologetic pro-reform agenda and on a slogan of “minimum government, maximum governance”.

I don’t think anybody can now have a doubt that the mandate is for serious structural reforms and strong governance.

What according to you will be the immediate agenda?

The immediate agenda would be to get the right people at the right places and getting the administrative machinery rolling again.

If you’ve listened to PM Modi’s speeches, however, he is going to have a broadly supply-side approach. So, it will not be a Keynesian “spend your way and somehow get your economy going” kind of approach. You will see PM Modi will have three or four broad thrusts.

The first one is to restructure the relationship of the Indian state with other stakeholders, such as business and common citizens.

So a lot of thought will be given to removing old laws, simplifying procedures, and increased transparency in the way decisions are taken.

Secondly, you will see a lot of emphasis on implementation of infrastructure projects. This will include soft infrastructure like skill development. The third major change will be the relationship with the states.

As PM Modi was himself a chief minister, he will be quite sympathetic towards the states. Not everything can be done from the Centre. You will see a significant amount of power will be decentralised out of Delhi.

Some of these are long-term structural changes. But a lot of stakeholders are waiting for immediate steps?

This is where one will have to be patient as supply-side reforms take time.

These will take 12-18 months to bear fruit. In 18 months you can judge whether these reforms are flowing through. So, one has to be a little patient and not expect an immediate boost to the economy from either monetary or fiscal sources.  

Do you think inflation will come under control?

It is very clear that both RBI governor Raghuram Rajan and the PM are very keen to control inflation.

If there is one near-term agenda that they have, it is controlling inflation. There are serious structural problems to the economy.

Pushing the economy artificially to grow will create more inflation.

By and large for the next six months the ship will be kept very tight as structural reforms are implemented. As the supply side begins to open up and inflation falls, monetary policy will become more accommodating.

How will another macroeconomic challenge — that of fiscal deficit — be tackled?

The fiscal deficit has been a major issue in the past. You will see the costly entitlement-based approach being tempered.

A country like India may need some social security for the poor but it should be more like a safety net. The real thrust will have to be on generating revenues.

One of the things PM Modi has emphasised is that we need to have a radically simpler tax system. The current system penalises the few who pay taxes, particularly the salaried class.

You need a system where the tax rates are low, systems are simple and evenly applied.

Expanding the tax net should be a very important part of the agenda.

When do you expect announcements on these fronts?

I am not sure that the new government has enough time to come up with big measures for the July Budget.

The real big measures will come probably in next year’s Budget in February. You may recollect that banking transaction tax (BTT) was considered by PM Modi. While BTT itself may not work, it shows his openness towards radical tax reforms. We need to think about killing this fiscal beast in a completely different way.

Do you think that the equity markets have overreacted and priced in a lot of expectations?

Equity markets are currently difficult to gauge as the market has probably priced in a lot of things ahead of actual events.

Nevertheless, India remains a very attractive market for the longer term and could attract very large foreign capital flows.

After all, India will replace China as the world’s largest workforce in 10-15 years. To attract both domestic and foreign investment, India needs a transparent and stable policy regime. We hope PM Modi will deliver this.