Feb 08, 2013 04:54 PM IST | Source: CNBC-TV18

Muted global growth, steep oil rates to keep CAD up: Nomura

Sonal Varma, economist- India, Nomura Financial Advisory and Securities maintains that the Central Statistical Organisation's (CSO) FY13 estimates of GDP at 5 percent fall below the expected range of 5.3-to-5.5 percent.

Sonal Varma, economist- India, Nomura Financial Advisory and Securities maintains that the Central Statistical Organisation's (CSO) FY13 estimates of GDP at 5 percent fall below the expected range of 5.3-to-5.5 percent.

The economist adds that bond markets might be pricing-in an expected cut by the RBI in March and says that recovery could be tepid in FY14 in an interview on CNBC-TV18.

Varma is skeptical of the sustainability of the global turnaround, points out to the  RBI’s shifting in focus to the current account deficit and expects the FY13 current account deficit to be around 5 percent

Below is the edited transcript of the analysis on CNBC-TV18

Q: Did the 5-percent GDP surprise you? What do you make of the softening of yields in the bond market immediately after the data came in?

A: The GDP of 5 percent was definitely on the lower side as compared to expectations of the GDP to be in the 5.3-to-5.5-percent range. It seems to indicate an across-the-board slowdown. So clearly the view is that growth is bottoming out and there are questions being raised on whether that is true. The bond market reaction is not surprising. The markets are probably starting to price-in some probability of a rate-cut at the March meeting, a view that we don’t subscribe to, but could explain the reaction.

Q: Do you really think the GDP will fall to sub-5 percent levels in this quarter and next? Do you think that is a high-probability outcome?

A: Going by the 5-percent reading, that possibility cannot be obviously ruled out. But what needs to be kept in mind is that the contraction in government spending has really started only from September 2012 and did not show up in the first half of the fiscal year. The significant cut down on both Plan and non-Plan expenditure was initiated only in the second half of the fiscal year there and according to estimates, this will impact growth by 30-50 bps.

So to that extent, there is a risk to the GDP particularly in the third quarter from lower government spending and full impact of a lower kharif output. What I would like to highlight is that just because the GDP in the first half is 5.2-to-5.3 percent does not mean that in the second half of the fiscal year the GDP has to be 4.5 percent. It is possible the first-half data are revised to lower levels.

Q: What is your estimate for next year based on the evidence of suggestions submitted by the Central Statistics Office (CSO)? Could the recovery be more tepid than what a majority on the street are talking about?

A: Our view is that the recovery will be very tepid. I think it is not clear what factors will drive growth. The government is consolidating its fiscal finances, the employment prospects do not look good and if suppressed inflation is released, then consumer demand is likely to take a hit.

The global export cycle at the start of every year looks promising but turns out be unsustainable. I think the trend is similar this year. The December-to-January data start to look good, but once the second quarter is underway all that promise of  recovery actually starts fading away.

The current global turnaround offers no certainty of being sustainable. In our judgment, given global fiscal consolidation, the export outlook will also remain weak. So, yes growth recovery will remain very tepid probably at about 6 percent for FY14.

Q: The government is trying to tighten its fiscal belt, but at the same time crude has started inching towards the USD 118-level again. Could rising commodities significantly nullify the government’s efforts at fiscal consolidation?

A: The government’s efforts will be nullified to a large extent. To the extent that the currency has appreciated, under-recoveries could also come down. So definitely it will make the government’s fiscals initiatives much more challenging. We cannot increase the pace of the monthly price-hike in diesel that the government has already announced and this means the government will have to further cut Plan expenditure and other expenses in order to achieve its fiscal targets.

Q: Do you think after the Budget, if the government presents a credible fiscal deficit plan for next year amidst reduced estimates of recovery in growth, the RBI would actually cut rates again?

A: I would like to highlight the changing perspective of the monetary policy framework, seems to be. The focus has shifted from growth-inflation or growth-inflation-and-fiscal to the current account. So what the government is doing will have some effect on the RBI’s process of policy formulation.

If the global recovery remains subdued when oil prices are actually moving higher then the current account situation is going to turn very negative. We are forecasting a current account deficit of around 5 percent in FY13 and if the global growth outlook does not improve, the levels of CAD will continue to be very high even in the next financial year. And to that extent, I think RBI's hands will be tied even there is fiscal consolidation or a fall in inflation.

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