NIFTY 50

Except demonetisation, Modi government managed economy perfectly, says Martin Wolf

Updated : January 17, 2019 06:41 AM IST

Martin Wolf is a British journalist, who focuses on economics. He is the associate editor and chief economics commentator at the Financial Times and was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”. Wolf said Narendra Modi government has managed economy perfectly except demonetisation issue. By any international standards, the Reserve Bank of India (RBI) is certainly very highly capitalised, he said. On Brexit, Wolf said the UK is likely to crash out from the European Union (EU) without any deal. In an exclusive interview to CNBC-TV18, Wolf also spoke about Urjit Patel's resignation as RBI governor, US-China trade war and slowing down of Chinese economy among a raft of other topics.

Edited Excerpts:

Q: There are so many questions surrounding Brexit for starters and not to speak of a world economy that is torn apart by trade and tariff wars as well as probably slowdown in two of the largest economies of the world. However, I will start at the beginning and I will start at your doorstep, Britain itself. Explain to us what are the next possible steps? Do we have the same Prime Minister renegotiating with European Union (EU)? Do we have a different Prime Minister renegotiating with the EU? Do we have another election or do we have another referendum?

A: The answer to that is I don't know. I am here in India and I feel quite detached from what is going on. However, the truth is I think nobody in London knows. I believe there will be a vote of no confidence in parliament today and almost everybody expects the Prime Minister will win. So, we will not have a new Prime Minister,  but the same Prime Minister.

If that is the case, I stress that she has to decide in a way what she has to do. She is required or has been asked to provide a new plan in three days. My own guess is that she will go to Brussels and ask them if they can make any changes or make a difference. I suspect she will be unable to find a set of changes in the discussions with Brussels, that will begin to give her a majority and a smashing defeat. So at that stage, the obvious possibility is that she sticks with where she is and we crash out with no deal as we do not get this through at the end of March 29.

However, there is also a possibility that either Labour as a party or parts of the Labour Party unite with the Conservative Remainers to impose upon the government essentially and some other alternative of which the most likely one would be agreement to another referendum. That would require us to get an extension of the withdrawal period from the Article 50 from EU. We probably get that, but not certainly and then somebody would have to organise and carry out what will be a very complicated referendum probably with three options.
So, in my view at the moment we are likely to crash out without a deal.

It is not very likely that she will be able to get a deal like the present one through and there is a significant rising possibility. But still not a huge one, which will end up with another referendum that could mean that if the remain side won, then we never leave the EU at all. All this is uncertain, chaotic and completely unprecedented.

Q: We have not seen too much of chaos in the financial markets in spite of what is a very seminal decision for Britain. What is your sense? Do currencies continue to remain within a range as it were, I mean there will be highs and lows, but nothing very catastrophic?

A: There are two factors here. The simple truth is that Britain is not an enormously important economy. It is the fifth largest, but it is really quite a small economy and this is essentially a crisis that concerns Britain. So, worse comes to the worst, the pound will fall if we have to crash out without a deal and British financial assets will decline. However, my own view is this does not look like a really significant world event and I would not expect it to lead to a massive financial turmoil.

Q: Do you think EU will more or less rumble along with the same kind of members and rules to the end of 2019 and may be to the end of 2020 as well?

I am quite confident that the Britain's departure will not be significant for EU unless something quite extraordinary happens.

However, nothing can be ruled out in world affairs and I expects the EU to be around for decades not just for a year or two. Of course, its economics are in trouble. I expect the ECB may be forced to pursue more quantitative easing (QE) and it might not like this, but I do not see any existential crisis in the EU.

Q: The trade tussle between US and China, you think that it comes to an agreement before that 90 day period or do you think that it will revisit at several points in 2019 itself?

A: This is another immensely unpredictable thing and the main reason that it is unpredictable is the way the US administration works. US President Donald Trump is wildly unpredictable, nobody really knows what he wants from China, nobody really knows whether what he wants from China is what his administration officials say they want from China. Nobody knows what deal he made with Xi Jinping will amount to. My guess is that in 90 days, it will not lead to a resolution with China. US might say that they have made some progress, but many of the big issues that American's have insisted upon will not be agreed by China as it's really radical.

However, there is another possibility and that happened in North American Free Trade Agreement (NAFTA) negotiations. Here, the Chinese will offer enough to Trump and he feels that he can declare a victory. Trump knows that his supporters don't understand the details anyway and he can declare a victory. Trump can say that US got everything they wanted and in that case, the dispute will be over and this is why it is unpredictable. So, the real issues will not be resolved, but may be Trump will say it has been a triumphant success as the Chinese threw him a few bones.

Q: Do you expect China to slowdown significantly? We got quite a shocker in terms of their latest trade data.

It does appear that China is slowing more than most people realise.

Many of us had felt for quite a long time that the Chinese economy is quite fragile as it's so dependent on investment and the investment rate is so unreasonably high. So, I do think China might have a problem in dealing with the slowdown and it is quite possible that the slowdown is bigger than they are yet admitting.

So, what will they do about it? To deal this problem, China will start the credit boom again and that means getting even more debt. Now, that might solve the problem in the short run, but it will make the longer run problem as China has even bigger problems. That underlies the important issue that China faces some really big structural and reform issues now. It has faced them for some years and it is very difficult in their experience to resolve them. It is because of that situation that China find this immediate cyclical problem so difficult.

Q: What is your reading of the US economy? This year, they will have to manage without that big tax advantage that the companies had last time. The Fed seems to be coming around to the fact that may be things will slowdown, but what is your own assessment? Do you think rate hikes are over? You think even the balance sheet contraction is going to be slowed?

A: My guess is that it is quite likely that Fed hikes are finished or nearly finished. The underlying reality is that the US economy isn't that strong. In my view, quite improper fiscal expansion is now passing through US economy. Underlying growth of the economy is closer to two percent potential growth than the three percent or so that US is talking about, possibly even less than that.

Inflation is well under control so far and we are not seeing any problems there. What the Fed wants to do is to get the growth round to that sort of level and it seems to me where it is going. Unemployment is very low. Basically, we are seeing the US move from a very strong cyclical upswing to a slower long term trend growth and that will probably continue to be very modest interest rates, because essentially the economy cannot stand higher interest rates than this.

Q: Your initial views on India, when you heard about the central banker Urjit Patel suddenly resigning. Did it bring doubts about whether institutions are firm in India?

A: Well it was certainly a shock. It is not a normal event. I don't think I have any clear idea of why this happened. We have no clear idea of why this happened, but we do understand very clearly that there is a lot of disagreement between the government and the Reserve Bank of India on a quite a number of issues -- on monetary policy, financial regulation, so called dividend, the special dividend, whether the RBI has excess capital  and whole range of issues, which are obviously very significant. Obviously, people outside who don't know the details will look at Patel's resignation in that context.

Q: Have you studied RBI's capital issue or any central bank's capital issue? Would you believe it is over capitalised?

A: This is a very complex issue in economics. Economists disagree very strongly on whether central banks need a strong capital position. I noticed that Raghuram Rajan, who is a very distinguished economists and former governor of the RBI, thinks it is very important particularly as the government of India does not have a high credit rating than the RBI, which has a very strong capital position.
I have to say that personally that I am one of those people who tends to think that the amount of capital in a central bank really doesn't matter that much.

It is a branch of the government. It is not like an ordinary bank, it can't be wound up. Its liabilities are money and it can create money freely that is what it is for. Central bank with huge amount of capital of its own is not quite obvious for me. By any international standards, RBI is certainly very highly capitalised. So, in this specific issue, I feel that the government of India has a reasonable case. I don't want to get involved in this in detail, but this is a matter of judgement that there is no very clear answer on who is right. Economists and serious economists differ on this issue very significantly.

Q: Let me come to another issue on which you are better placed. You have been observing the NDA government, the Narendra Modi government for the past five years. They are about to seek to renew their work permit yet again in April, when the general elections will be called. What is your assessment? He came with a great deal of promise and at least, Indian voter placed a lot of faith. He came with a 335 out of 545 majority well over two-thirds majority for the first time in 26 years?

A: If you are asking me what is my overall assessment, I would make it something like this. I think the Indian economy has continued to perform reasonably well, not startling well, very much inline with the longer term trends.
I think the government has implemented some significant reforms such as the introduction of Goods and Service Tax (GST), which is an important one. The bankruptcy code is an important one.

They have made some steps and I think too slowly to restructure and recapitalise the banking system. I regard demonetisation as an extra ordinary policy for which I can see no serious justification and I remain of that view. As an outsider, I see continuity, not radical change, not radical transformation, some sensible reforms, perfectly reasonable management of the economy except over the demonetisation issue. Therefore, nothing revolutionary, but on the other hand also nothing really seriously disappointing.

Q: Let me just expand the canvas to the whole challenge that liberals and elites have been facing and even globalisation as a concept has been facing. Do you think this challenge was a reaction to the crisis and the way it was handled and that liberalism will come back to win another day?

A: It is quite a complicated set of challenges. One of the things that I haven't realised at all, but that was stupid, is that in a way a bigger challenge was going to be to democracy than globalisation. A lot of the backlash if you like has an authoritarian tinge and to some extent, it is anti-globalisation with exception of America, where there is a very strong protectionist shift that you do not see in the same degree elsewhere. The main sort of anti-globalisation thing going on in the West is anti-migration and anti-immigration, which was not something we were thinking of so strongly. So, I would say that the really striking thing has been the rise of nationalism and authoritarianism less than the rise of anti-capitalism and anti-globalisation. The big exception to that certainly has been the US, where it is clear that they have elected a man who in addition to being a nationalist and having authoritarian tendencies, is quite a strong protectionist. How this protectionist administration will end up being at the end of the day is quite unclear. They will say that they just want a level playing field. So, when I look at this now compared to what I expected 10 years ago, when I had expected more of a backlash against capitalism and less of a backlash against democracy, it seems to me have gone a bit in the opposite direction and indeed that is what I am focusing on. I am writing a book at the moment about the crisis of democratic capitalism with the emphasis very much on democracy.

Q: Just about 10 years ago, we thought there is Arab spring and democracy canvas will actually spread across the world. Do you think democracy wins this challenge that this populist larger than life leaders is a passing phase?

A: It is a very interesting phenomenon. What you call as large than life, what we call strong leaders have emerged in many important countries over the last 20 years and have been increasing in the last 10 years. In fact, most of the major countries of the world are now run by people like that. They are elected, so you continue to have a electoral process. They tend to be rather hostile to established institutions, rather hostile too and this varies across countries. Some are hostile to free press, to what they call fake news, to the rule of law and legal institutions. So, we have plebiscitary dictatorship as dictatorship is a strong word.  Dictatorship means an elected leader, who is the focus of sovereign power and is elected, but to some extent rides roughshod over what we thought of as liberal democracy.

Now, that seems to me a subtler way of thinking about what is going on. It can still be democracy, but the question is, is this democracy compatible fully with the sort of liberties, freedom under the law? I do not want to be simplistic about it. But looking at the world now, looking at the major states of the world, that seems to be what is emerging. Where that will go in the end, will democracy become a shell? Will the elections be real, that is the big question.
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