1. Column: From Ananda, with love

Column: From Ananda, with love

RBI will find it difficult to manage inflation while ensuring the rupee doesn’t become too strong

Updated: November 21, 2014 8:46 AM

I spent a few days last week at Ananda, a spa in the Himalayas, and, boy, was it a delight! I twittered with the birds, talked to the trees and twinkled with the stars. The air was so clean my brain stopped working. It was wonderful.

As I returned to earth, I found I had a remarkable clarity. Stopping at Delhi airport around 5 p.m., I could feel the focused intensity of the economy coming back to life. And, when I arrived in Mumbai around 8:30 p.m., there was no mistaking the buzz. The city was alive, cooking with gas—it felt as if it were 2005 all over again. Clearly, economic growth in 2015-16 will be higher than the most optimistic estimate now.
And Mumbai itself will be one of the key drivers. As anyone with a modicum of sense knows, any meaningful investment in the city will deliver far more value to India’s growth story than that same investment anywhere else. And whatever you may feel about prime minister Narendra Modi, there is no doubt that he has more than a modicum of sense. Thus, with the new BJP (or, more correctly, Modi) government in Maharashtra, look for fast and furious changes—Suresh Prabhu as railway minister is already the first step.
Unfortunately, while high energy, high powered development is just what the doctor ordered for Mumbai (and India), the fundamental problem of corruption remains loud, front and centre. In Maharahstra, 74 of the 122 BJP MLAs (nearly 61%) have criminal cases against them, 46 of which are for serious crimes; the comparable ratio for other party MLAs is lower, but a still-atrocious 55%. Thus, as growth and investment accelerates, there will be more and more opportunities to loot the treasury, which, if unchecked, could very quickly drag the growth explosion into a morass of corruption, as bad as we have seen in the recent years. Given his articulated plan to run a clean government, Modi will need to police the BJP’s MLAs in Maharashtra, as well as those in other states and, of course, his MPs, all of which would be a full time job.

The good news, of course, is the announcement of the Delhi assembly elections. Clearly, it will be a two-horse race between Modi (the favorite) and the AAP, resurrected by circumstance. Given the BJP’s money power, which appears to be much more than the Congress at its best (or worst, depending on how you look at it), it will be very difficult for the AAP to get a majority. Nonetheless, sitting in the opposition with a respectable number of seats may well be a win-win. More important is the campaign, where the AAP will be able to demand candidates who are criminal-case free and transparent about their (and their party’s) funding. Indeed, if the AAP plays its cards right—meaning it doesn’t scream about generalised (or even specific) corruption, but simply focuses on these two issues—we could end up with an election where the two key candidates for each seat is clean, at least from these perspectives. This would be a major victory for Indian politics, and will set the stage for improvements in subsequent elections.

This is the kind of structural change we need to sustain GDP growth, which, as I have already mentioned, is accelerating. Of course, this means that inflation management will remain tricky. Currently, with India an outlier in a world of falling commodity prices and threatening deflation, RBI will find it extremely difficult to titrate monetary policy to manage inflation expectations on the one hand and ensure that the rupee doesn’t remain too strong for export competitiveness on the other.

This is all the more important given that global growth is stumbling again. Europe is closed for business, China is slowing down and Japan is on the ropes. The US trade deficit has started widening, reinforcing the fact that while US growth may be improving, global demand remains pathetically weak.

This also points—with Ananda clarity—to a continued strengthening of the dollar. With the yen on a straight and rapid path downwards, gold languishing below $1,200, and the Euro heading for the cellar —remember it started life at below parity to the dollar—there ain’t no place to go but the dollar. Its beginning to feel like the late-1990s again, when the dollar was the only game in town and it rose and it rose and it rose. And it rose some more.

If this does turn out to be the case, the rupee will have to fall and fall and fall and fall. Except that with India quickly becoming the second-best (after the US) game in town, investment flows could hold up this natural process.
To manage this extremely tricky situation, RBI Governor Raghuram Rajan should take his key advisors on a retreat to Ananda. I would be happy to play tour guide.

Jamal Mecklai

The author is CEO, Mecklai Financial Services

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