Shankar Acharya, ICRIER, says that yesterday's IIP data displayed a poor growth story and he feels that the production performance in the agriculture sector is also not likely to show better performance due to poor monsoons. He says that strong sectors like telecom, construction and others have already shown signs of slow down even before last quarter.
Below is the edited transcript of his interview to CNBC-TV18.
Q: In the last couple of days there has been only bad news, it seems like a race to the bottom from 5.5 to 4.9%, do you think these are alarmists numbers or realistic?
A: The numbers are in the realistic range because the numbers in the final quarter of 2011-12 had already dropped to 5.3% and there are no indicators of any rebound. Yesterday's IIP numbers hardly needs repetition and agricultural production performance is not likely to be good either due to poor monsoons.
There were signs of slowing down in strong sectors like telecom, construction and others on the service sector side even before last quarter. When we compile all the data together we may figure a growth of sub 5% for 2012-13. It will be difficult achieve 7% growth but it is easy to chart a growth rate of 5-5.5%.
Q: Do you see the service sector to grow below 8% this year?
A: It is possible. The telecom sector have also been under its stress, the corporate numbers margins in the major telecom space have shrunk a lot and the fallout of the 2G scam is continuing to take its toll. So a leading sector like telecom is going to be less dynamic than it has been in the past.
On the software side most of it is exported, there are also some signs of slowing down though some companies here are doing better than others. But the fact is it is not the old uniform story of every major IT company going great gun, which used to be the story until about a year ago. Putting it altogether it's harder to be optimistic than pessimistic on growth.
Q: Do you think we are looking at three more quarters of this deadly combination of falling growth and very high inflation?
A: It is not just inflation. It is about monetary policy and possible outcome of fiscal. Ever since March Budget, we heard from the Prime Minister and others about the new bite the bullet on subsidies and diesel prices but nothing has worked on that front.
Four months ago it was a better time to hike the prices. If the prices of diesel and LPG increase then it will be a different story. A correction in fertilizer subsidies will narrow the gap of fiscal deficit but due to poor monsoon year a correction looks unlikely. No change in diesel and LPG price will be a worrying factor.
Service tax revenues will also be subdued given what's happening to industry. There are chances that fiscal deficit number of 5.1% getting increased by another 1% of GDP which translate into another Rs 110,000 crore plus of market borrowing.
So what does that do to medium and long-term interest rates? They will only go upwards to accommodate borrowings against that background how can the RBI meaningfully expect to achieve much by reducing overnight repo rates.
The worry is whether inflation will continue at the rates that we have seen, for another couple of quarters, quite possibly because of stress on the agricultural side for and secondly, if and when, hopefully diesel prices are adjusted, for some time those price increases work themselves through.
That is not a reason for not doing them because they are still a temporary effect. But that temporary effect does last two-three quarters. They may not happen but either way to expect a rapid decline in inflation rate from where they are today, it is too optimistic.
Q: Do you see a change in this fiscal situation because the new FM said that he will relook at 5.1% target. With week monsoon it seem increasingly less likely that he will be able to move on diesel prices or even control any subsidy programmes which make it challenging to reduce the deficit at all?
A: Technically it's possible for the government to work out a program for protecting the farming community to a large extent from any diesel price increase, if they wanted to. Going ahead with the diesel price increase for the large majority of the economy, which is not the farming community for diesel, is mostly in transport and industry. So technically it can be done.
But the general atmosphere of opposition to that is no better than it was three-four months ago. One will have to wait and see what the FM does because on the revenue side the stories are bound to be less than what was in the Budget and on the expenditure side unless they bite the bullet on diesel and LPG. I don't see how they can prevent a very serious deterioration in the fiscal outcome from what was budgeted in March.
Q: With continuous postponing of hard decisions, we are losing a lot of time because rating agencies have given warnings and they have waited for two-three months and not much change on the margin has happened. So if in the next few months we are still staring at 6% deficit, 8% inflation and growth slipping to 5-5.5%. Do you think it’s likely that we might get rating downgrade?
A: There is a possibility of getting a downgrade rating. This has been unfortunately the story of several years now where we simply are kicking the can down the road whenever it comes to doing something sensible on economic policy. The tragedy is that the longer you wait, the harder it is to do the right thing; politically in terms of psychology of the action and so forth and that compounds the problem, but the problem doesn’t go away.
On the external sector, we all are hoping softening of crude oil and gold prices will make our external balances like current account balance more manageable and to some extent they may well might. But we do still have vulnerability of a fairly higher order to deterioration in the external circumstances whether it comes out of Europe or some geopolitical situation relating to Iran and so forth.
So, our macro strength is weak, vulnerability is high and our performance leaves a lot to be desired.