Moneycontrol
Mar 04, 2013 11:41 AM IST | Source: CNBC-TV18

See inflation tapering in H1CY13; GDP at 4.5-5%: JPMorgan

Aziz feels the massive cuts in the government’s planned expenditure in FY13 is likely to continue in FY14 as well. According to him, the government is likely to execute its planned expenditure in the second half of calendar year 2013.


The country's economic woes have been a much debated topic and the gross domestic product (GDP) figure for Q3 stood at 4.5 percent and expectations of a weaker GDP number in Q4 is looming large. Jahangir Aziz of JP Morgan said, "My guess is that it is not going to rise up very much from this 4.5 percent trajectory. So, may be it will be a tad higher to about 5 percent and it depends on what they did to the base. They keep revising that again but, it will be somewhere between 4.5 to 5 percent in the first half."


Aziz feels the massive cuts in the government's planned expenditure in FY13 is likely to continue in FY14 as well. According to him, the government is likely to execute its planned expenditure in the second half of calendar year 2013. He also sees some stimulus reduction taking place this year.


Besides, Aziz expects inflation to taper down in the first half of the year and believes it may once again surge upwards in the second half. "We again expect inflation to taper down in the first half of the year, probably till about June and from June onwards we will once again see WPI inflation crawling back up, may be it won't be a crawl, may be it will be a surge, but we definitely see inflation numbers picking up again from June, even earlier from May onwards," he explained.


Moreover, the government's economic management plan has successfully staved off the imminent risk of a ratings downgrade, added Aziz.


Here is the edited transcript of the interview on CNBC-TV18.


Q: Let me begin with the gross domestic product (GDP) numbers for a change. Q3 is at 4.5 percent but, could Q4 be worse? We now know that the government has made savage cuts in its plan expenditure this year by over 20 percent and most of it would have fallen in Q3 and Q4. So should we therefore expect a weak Q4 as well?


A: If you just look at what has happened to fiscal withdrawal this FY13, it has been the largest fiscal withdrawal we have seen. If we remove asset sales from what was the outcome in FY12 and what is the projected outcome for FY13, 1.5 percent of GDP is the actual turnaround once you exclude asset sales. That is really what has impacted the economy.


As economists, you feel a lot of confidence that what is happening on the policy side is actually getting reflected on the growth side. If I extrapolate in the first quarter, the amount of withdrawal is already built into the FY13 Budget. I would say it is very difficult to get past a 4.5 percent number in the first quarter.


So it will be somewhere around 4.5 percent, it might even be a little less given the amount of fiscal stimulus that got pulled out in the first quarter. We have always been much closer to the CSO’s view that growth is probably going to be closer to 5 percent and we have remained there.


Q: How are you looking at gross domestic product (GDP) growth next year, that is FY14? The economic survey spoke of 6.1 to 6.7 percent and the Budget is based on a 13.4 percent nominal GDP growth. If you keep cutting the plan expenditure, won’t these have a lagged effect? How much are you expecting growth next year?


A: Last year we had 7.5 percent as the real growth projection. You need to take it with a bit of salt. Budget is going to be the key. Let us look at the way in which the finance minister has presented the Budget. He has 19 to 20 percent revenue based growth as you rightly pointed out on a 13.5 percent nominal GDP growth which is very unlikely to happen.


He has a 30 percent increase in plan expenditure. Chances are that we will have a repeat of this year. There is a revenue shortfall and that is reflected in a significant squeezing of plan expenditure, but there is also election. So, what is the timeline that the government will take in order to squeeze its expenditure down? My guess is that unlike last year, when most of the squeeze took place in the second half of the year, this time it is going to be in the first half of the year and then they go and unleash this massive amount of plan expenditure so that the economy feels good and everybody feels good just as election momentum is building up.


The first two quarters are reflecting that. My guess is that it is not going to rise up very much from this 4.5 percent trajectory. So, may be it will be a tad higher to about 5 percent and it depends on what they did to the base. They keep revising that again but, it will be somewhere between 4.5 to 5 percent in the first half.


The second half is where I think there is a significant potential of all of this planned expenditure being unleashed. Growth is actually ticking up because of this expenditure increase. You could see significant multiplier effects in the consumption side and this is where I am afraid of, you could also see significant multiplier effect on the investment side as well.


The reason I am afraid of that is because you have Rs 6.25 lakh crore of borrowing programme this year. If in the second half of the year, even if they go in for a higher borrowing in the first half, they usually do that, there is a lot of borrowing in the second half of the year. If people have a credit upsurge at that time, you could see serious pressures on the 10-year rates and on lending rates in general.


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Q: What's the inflation trajectory that you see in the next fiscal? Has the finance minister squeezed the aggregate demand enough in FY13, so there is a chance of inflation dipping perhaps?


A: In FY13 we saw a 1.5 percent decline in the actual demand impact coming out from the Budget. That of course has a multiplier effect. In this year’s Budget if you again do the same exercise and take out assets sales of FY13, take out projected asset sales of FY14 and look at the Budget as an impact, there is actually no consolidation. It is exactly the same deficit target and therefore, my guess is that there isn’t very much actual stimulus at least which is removable from the planned Budget.
 
The planned Budget cannot be implemented the way it is envisaged. It has to be implemented the way in which it has been done last year. So, my guess is that there will be some stimulus reduction that is taking place coming out of the Budget and the government has some amount of fiscal stimulus reduction again this year.


Based on that, as long as growth does not upsurge in the second half of the year, we should see inflation taming down but, again going back to the same trajectory that we have. We again expect inflation to taper down in the first half of the year, probably till about June and from June onwards we will once again see WPI inflation crawling back up, may be it won’t be a crawl, may be it will be a surge, but we definitely see inflation numbers picking up again from June, even earlier from May onwards.


Q: What about the rating agencies. Now that the finance minister has ticked his boxes in terms of the fiscal deficit target at least, do you think that the threat of a ratings downgrade is out of the way?


A: The biggest achievement of the new economic management team has been that they staved off almost an imminent ratings downgrade. This is one thing that the market appreciates. It is a fact that not too long back when you and I were talking back in August, we were talking about whether the fiscal deficit could be contained below 6 percent and if we were successful in doing so, we will be fortunate. He has brought it down to 5.2 percent.

Maybe we don’t like his methods but, as a result of that we have pushed back the ratings downgrade at least till post the May 2014 elections.

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