Transcription
[music] >> Welcome to Indianomics. I have among the best of guests from the city conference. I have with me Gita Gopinath, former chief economist with IMF, now with Harvard, and quite clearly one of the most followed economists in India. Gita, thank you very much for this unscheduled stop at the CNBC booth.
>> Always a pleasure to speak to you, Latha.
>> Thank you. Thank you very much. Well, I heard you earlier today, and you were saying that the IMF has said this year's global growth can be 3.1% according to them, but there is a downside risk to it. How bad do you think it can get?
>> So, right now we have two stories playing out in the world, which is one is what's happening in the West in West Asia, and the whole moves, and the fact that it's still closed, though there is optimism that there will be a deal soon. That's the negative side, but there is a positive story, which is coming from AI, and the whole AI build-out that's happening, that is raising a lot of boats, including not just in the US, but also in like Korea and Taiwan. And depending upon where you are, you're getting affected differentially by these two major trends that we're seeing right now. So, for the world economy, I expect that the IMF will could, you know, in all likelihood reduce global growth projections, but somewhat modestly, not by a large amount, because of these two opposing forces. I mean, in the case of India, I think the the challenge is that because of what's happening in West Asia and the impact on on oil and on gas and so on, that is a negative impact on the Indian economy. It's also inflationary, as we would expect it to be. But then you also have that on AI, the story is not positive and therefore that is reducing the amount of interest in terms of foreign capital in India.
>> No, I I I take your point that there is there are downside risks. But the numbers that come out in terms of capex cycle in the US, the investment as you said in your speech, 800 billion only in AI from four, five top companies. And if you took the entire capex, you know, along with data centers and everything, it's some 4 trillion in terms of capex that's going in. Taiwan and China and Korea are putting in their own capex cycle. And the stock market at all-time highs in Japan, Korea, Taiwan, China, not China maybe, US also creates a wealth effect.
>> Right.
>> Can't this multiplier lift all boats? I mean, more export markets for India. You don't think that there is a positive >> to spin off to the capex?
>> No, for sure. When you have global growth increasing, which will be the case if you have a lot of investment happening in these different parts of the world, there is absolutely positive spillovers to the rest of the world and that helps. It that is a positive. But obviously you're going to be better off if you are the country where all this enthusiasm and optimism is there as opposed to if you're having more the second round effect of that spillover.
>> Fair point. I mean, I at the moment we are suffering the negative, so I'm trying to look for straws in the wind to to see if there's anything positive. Then we come to the India part. Clearly we are impacted by our current account deficit being higher than last year and capital flows simply not enough to bridge the gap. You have earlier said that you know, let the rupee take the you know, the hit or so to speak, let it be the balancing factor. It can also become self-fulfilling and start hurting other macros if it goes down more than already three standard deviations less than the long-term average in terms of real effective exchange rate. So, do you think interest rates should be deployed to protect exchange rate or are you the uh you know faithful to the flexible inflation targeting?
>> So, I'm actually somebody who believes that in flexible exchange rates, but I'm also very well aware of the risks associated with having the currency move around in, you know, too volatile a fashion and an unexpected fashion. And so, therefore, you know, some of the work that I did at the IMF including creating the integrated policy framework was precisely for countries to know when to intervene and when not to intervene in currency markets. There are times when intervention is helpful when you see disorderly market conditions. And you know, yes, when there is a depreciation of the currency, there can be some piece that is looks disorderly and there is some intervention and when the RBI is doing some small amounts of intervention. My basic point is that there is no argument for a whole scale, let's keep the rupee unchanged and unmoving at this moment because this is a fundamental shock and having the rupee depreciate will be supportive. If you don't and you artificially prop the currency up, then actually it can be self-defeating because foreign investors are also going to think, well, the currency is going to depreciate eventually and they're just going to stay in the on the sidelines. So, there's always a trade-off. You don't want anything terribly disorderly, but you do want the currency to react to fundamentals. At the current point, I would say that the fundamentals are an important part of the story, which is why letting the exchange rate play its role as a shock absorber is helpful.
>> Okay. But, to To other point, there are the flexible inflation targeting theorists and purists who believe that you use interest rates to curb inflation and other other steps for exchange rate. And there are countries like Indonesia which also use interest rate to protect the exchange rate. Do you think India should also think on those lines?
>> No, at this moment, I don't think there's a reason to raise interest rates to protect the exchange rate. For also the reason that given the negative impact that the war is having on production in India and in terms of demand in India, you know, that opens up makes the economy slow in terms of economic activity. I I don't think there's an argument for the RBI to have to raise interest rates right now because that would slow the economy even further. So, just again, given what we're seeing in terms of the rupee and given the forces we're seeing playing out, the RBI can very much wait to see over time if there is something showing up that tends makes you worried about core inflation going up in a dramatic fashion or inflation expectations de-anchoring, then certainly in that case you could use an interest rate instrument to
>> Fair point. So, use it for inflation. Let me come back to the way in which, as you said, some countries have the negative impact of you know, the whole new straight closure rather than the positives of AI and we are in that club. Our current account deficit at 2% is having a problem getting it filled. You know, India went into marketized or market-driven exchange rates as recently as 1991, 1992. Since then, the world was also kind of, you know, uh there were there were no industrial policies. You had the China entering the WTO and therefore the world markets were liberal. But therefore we could always get money to fill our current account deficit. Now, do you think having a current account deficit itself is becoming a problem because all countries are nearshoring? They're building up tariffs. So, is it a time now to just go square on current account deficit? Those with current account surpluses have no problems. Those with deficits have.
>> Now, despite everything we've seen on tariffs, the world still remains very integrated. You know, 75% of world trade is still being conducted according to WTO rules. The US is run one of the biggest trade deficits it's had, you know, you know, and so there's nothing's changed over there. China is running very big straight surpluses. So, I don't think that that's the issue. In the case of India, again, a 2% current account deficit is not a big number. What has indeed changed is the ability to finance that deficit. And the fact that there's weakness in capital flows coming into India, either the short-term portfolio flows or FDI, is truly where policy action can be helpful, including in terms of, you know, reinvigorating domestic private corporate investment in India, again, continuing on the reform path. There should be a good story on AI from AI in India, given India's long, you know, has grown as a service sector, given the success it's had with its technology, with its highly skilled workforce, with the startup culture that it has. All of that, there has to be new products and new processes that are AI driven that then also provide a good story for why it's a good place to invest.
>> You've already answered what I was going to ask you. Like, what is the recipe to solve the current account deficit in that case? Uh what more would you say? I mean, we clearly have fallen back on the AI uh game. Uh we are not up there along with the North Asian countries and China and the United States. What's your sense now? Is uh uh the AI story likely to be very negative for India? Or are people being unnecessarily pessimistic and that AI application will give us more jobs down the line?
>> Yeah. I mean, I think there is lots of reasons why India should be on the positive cycle on AI. Yes, right now there is the concern that especially with IT services exports that, you know, this could be a negative. But things don't always play out as in the you know, in a way you expect. For example, Philippines which has a very big call center, call call centers, large number of people employed, you've actually seen that call center activity grow in the Philippines because they're using AI to reduce the cost of the service and that has increased the demand for that service and that's actually growing the industry, right? So, similar positive dynamics can also play out in India. We're also now in a world where immigration is frowned upon in all of these countries, which means I think there's actually going to be more a demand for services outsourcing including higher-end services outsourcing and India can be a a location for that, too.
>> Okay. So, what's your sense about India? Is it that the worst is priced in in terms of crude and the negative sentiment around AI? Is the growth story still largely intact? Or is this going to be the year of reckoning?
>> I mean, it this is depends not just unfortunately on what India does, but it also depends on what's happening in the rest of the world. And I don't think we are completely out of the woods when it comes to the West Asia crisis. It's not been resolved. It's you know, Hormuz is still closed. And so, we could see things going much worse. So, I you know, the risk of volatility, the risk that there are further downsides very much is there, you know, even setting aside what India does just coming from the rest of the world. But I I mean, I want to leave on a on a positive note, which is the fact that it's quite impressive how India has been able to manage its inflation, manage its fiscal deficit at the central government level over these last 5 to 6 years despite all the shocks that have hit the country. And that's positive and that is one of the reasons why India would is an attractive country to invest in. You need to get the other aspects more, you know, to go right, which is including on the AI front, a positive AI story.
>> [snorts]
>> You have to make it easier to do business in India, deregulation, setting up factories, manufacturing, you know, we're back to now another wave of industrialization in the world thanks to all the geopolitics and geoeconomic fragmentation. I think this is an opportunity for India to be able to put the reforms, deregulate more, make it easier for people to do business, and I think that would be that would be positive. I mean, that would help bring in capital.
>> You know, that's a great wrap-up line, but like any market reporter, I want one more. Let me be Oliver Twist. What do you expect from the US Fed? Because this 4 and 1/2% risk-free return is also a danger to flows coming to emerging markets. I mean, for India it's an added reason. Does it get worse? I mean, will rates rise?
>> Yeah. The The 4 and [clears throat] 1/2% interest rates and more generally the fact that interest rates are higher in the US are a combination of things including AI because all of these companies that are doing large amounts of AI investment are borrowing more on the capital markets. So, there's an increase in demand for that capital that's coming from private sector. You India US fiscal deficits are large. That's another source of demand for the capital. So, both of those are keeping interest rates higher, including uncertainty around inflation.
>> El-Erian pointed out, that this is the 63rd month, you know, April, 3.38 3.8% inflation, 63rd month that it is above the 2% target.
>> Yes, it's also been a several years of really one shock after another.
>> So, good chance of I mean, we cannot write off
>> I mean, as of As of now, I don't think that I think the immediate in the near immediate future, the Fed will probably stay on hold. But again, if this continues and the AI story is generating a lot of economic activity, and the big concern is inflation, then we could see interest rates going up further.
>> Well, so long as the payoffs of growth are good enough, I guess in that we'll be able to, you know, withstand the interest rates as well. Thank you very much, Gita Gopinath. I know it's an unscheduled stop, but it's really kind of you to spend time with us.
>> Thank you, Lata.
>> That's it on this very special edition of Money Talks and Sport.
>> [music]