Nov 19, 2012 09:23 AM IST | Source: CNBC-TV18

Is economy out of rut as inflation eases? Experts discuss

At last inflation appears to be easing. The October reading at 7.45 percent was below than that of September by almost half a percentage point. Also the core inflation and food inflation both appeared to be easing.

At last inflation appears to be easing. The October reading at 7.45 percent was below than that of September by almost half a percentage point. Also the core inflation and food inflation both appeared to be easing.

On the other hand, the no show at the spectrum auction will probably bring a spring in the step to the government as the auction clearly makes the accusation of a Rs 1.76 lakh crore telecom scam looks like an overstatement.

So is the economy getting out of its rut?

In a CNBC-TV18's special show Indinomics, Saumitra Chaudhuri (Member of the Planning Commission and the PM's Economic Advisory Council) and Rajeev Malik (Economist, CLSA) analyse the implications.

Here is an edited transcript of their comments.

Q: The inflation number is easing but the governor of the Reserve Bank of India (RBI) says he is not impressed. How do you see the trajectory of inflation going forward? Do you think that atleast the momentum of inflation is behind us and the pace will decline further?

Chaudhuri: Actually it did not come as a big surprise to me. I thought the figure will be between 7.3 percent-7.4 percent, it came at 7.45 percent. Basically I think about a month ago, you did an interview with me in which I had said that inflationary momentum seems to be easing though the year-to-date or headline for year-on-year (YoY) inflation rate is still very high.

However, there seems to be some easing and that the depreciation of the rupee did not seem to reflect itself with higher manufactured goods prices, I presume that was because of lower pricing power and lower excess demand. That I think is what is being borne out and even if you look at that number of 7.45 percent, you will find that miscellaneous primary articles account for a lot of it.

Fortunately we do not seem to be getting the big pick up in perishable items which is a constant source of worry. I am not saying that we are out of the woods. We still have November and December and we can get unexpected surprise but by and large numbers should be giving a sense of a relief. Even if it is not comfort, certainly a sense of relief.


Q: Is it relief enough for rates to be cut?

Chaudhuri: That is a matter of – beauty in the eyes of the beholder. In this case, I am not the beholder.

Q: What have you made of the October inflation numbers, are you getting a sense that the sting of inflation is over and we are going to see a better and better inflation numbers?

Malik: Not necessarily. Bear in mind that one of the patterns that has been going on, is the upward revisions to the final numbers. For example, even for the month of August, the actual number got revised up by about 40 bps. So, if a similar or close to similar revision takes place, we are just shy of the 8 percent mark, which for all practical purposes would still be high.

It’s unclear whether the magnitude of the revision or the driver is going to be on the core side or on the food inflation side. The more meaningful part is after two-three months, inflation should begin to look somewhat better. So, even though this number was better than expected, but it has an upside risk. That means that the December move by the RBI is highly unlikely, but a January move cannot be ruled out.

Q: The other worry, of course, for the Reserve Bank governor will be the fiscal deficit not just inflation and now with the spectrum auction not at all going as planned not bringing much money, what is your estimate of the fiscal deficit for this year?

Chaudhuri: I do not think any one step would deliver the results. It is a combination of various initiatives and they need to be taken. I do not have the full information regarding either the expenditure or the revenue and I think nobody else other than the finance ministry has that information.

We know what is required to hit 5.3 percent, which is a fiscal deficit of Rs 200,000 crore and Rs 200,000 crore is something that is achievable. It is probably achievable by a number of steps. It could be something on oil prices, disinvestment or expenditure management. It could be many other things. The challenge is achievable and it is not going to be any one thing which is going to deliver the result, but the combination of several things.


Q: What are you estimating the fiscal deficit to be? Would you pencil in any further subsidy cuts or fuel price hikes at all?

Malik: Our expectation on the FY13 fiscal deficit has been 6 percent for quite sometime. There are obviously several moving parts, both on the revenue front and on the spending side. A couple of dimensions will dictate what the final outcome is going to be and whether it is possible for the final outcome to be anywhere between 5.5 percent and 6 percent.

Are we going to see any more adjustments as far as local fuel prices are concerned? My own sense is sometime between the end of the Gujarat elections and before the next budget is presented, another round of adjustments could quite possibly come through.

Second dimension is how successful the government lands up in going ahead with the kind of spending squeeze on different ministries that has been put in place.

And do not forget that certain allocations in the budget, almost never come through or come through to a much smaller magnitude. Defense is a very good case in point. There is a good chance that the government will have some room to play around with, but the negatives will still outweigh some of these positives. So net-net, the slippage is going to be more than 5.3 percent that the revised government estimates seem to be talking about.

Q: The other big worry is likely to be the current account deficit. Given the October trade deficit, do you think that the current account deficit is also going to reach that ugly figure of 4 percent this year as well?

Chaudhuri: Current account deficit is certainly something of concern. The PM’s Economic Advisory Council in its August report had a target of 3.6 percent. Now that, is pretty high and that is telling you how much one is worried about. The trade deficit of October came in at USD 21 billion which is a record high. The saving grace is the increase in the trade deficit between September and October and much of it is accounted by a surge in gold imports in October. Gold imports went up by USD 3 billion between September and October 2.5 actually and oil went up a bit.

However, going forward on the trade deficit, I expected exports to perform poorly till September and pick up in October. That did not happen. On a trade front, invisibles are probably doing better than one might have expected, but on a merchandise trade front things are not doing particularly well because the traditional exports are not growing and gold imports are flooding in.

That probably shows that, something more can happen on a financial asset side to make it more attractive and not build up obstacles to people who want to hold financial assets. It should rather facilitate them and then in the name of regulation, we should not scare people away. We should encourage them. There is some more that we can do on that front and hope that appetite for gold declines over in the balance of this year.


Q: Do you think that the current account deficit can be brought under control, given the way in which trade deficit is behaving?

Malik: If it sustains, yes, but my own sense is we are likely seeing some of the seasonal impact especially ahead of Diwali and possibly the impact of gold imports. One of the problems, is India does not release lot of the relevant details when some of the headline numbers or trades are announced.

However, it underscores our expectation on a non-consensus view on the rupee because we never bought this approach. We didn’t believe that the current account deficit will become far less of a problem because the government has raised import duties on gold, the current account deficit will become far less of a problem. People were fighting, falling head over heels and cutting their current account deficit numbers. Now, I think the momentum is going to be to inch it upwards. We will see a slight improvement but I think, what most of the times gets overlooked, is what matters for the rupee, and that is the overall balance of payments. You could still have a combination of a slightly better current account deficit, but still greater uncertainty as far as flow of capital is concerned; not to mention the inflation differential which will all play out to suggest a weaker rupee over the course of 2013. That remains a non-consensus call as far as I am concerned.

Q: What exactly is your rupee forecast for December-end or for March-June, basically for 2013?

Malik: What will play out for a currency which has become a high beta currency and if the central bank does not intervene, I think the point estimates will lose the underlying significance. For example, if all of a sudden after the Gujarat election, the government gets into a hyperactive mode as far as policy initiatives are concerned, you are likely to see some kind of a rally coming through, similar to what we saw for example after the mid-September reaction. Rupee gained to roughly around 52 and then slipped back as it should have, despite the fact that Sensex is higher now compared to back in mid-September.

So, we will have a fairly wide range over the next twelve months for dollar- rupee. It could be anything between 52 and 58. However, my own sense is when you include a combination of what is going on domestically in India and the fact that our own expectations for 2013 is for a stronger dollar, the rupee slipping past 56-57 is not an outlandish call at all, even if it appears so right now.

Q: Given the higher than expected fiscal and current account deficits, do you think a rating downgrade for India becomes more likely?

Chaudhuri: As far as rating downgrade is concerned, I do not think for two of the rating agencies a rating downgrade is right now on the table. It could become one, after a year or so if things do not improve.

As far as S&P is concerned, there is possibility that when the union budget is presented in February, they could take a view to say that while  there has been some improvement, the improvement isn’t what we expected, it is less than that and we go ahead with rating downgrade.

I would rather put my money on them saying that things have not improved as much as we’d want and we continue to keep it rating watch with negative implications. That seems more likely, but one cannot bet on it. As far as other two are concerned, I think it is not going to happen in February but if things do not improve, then this would happen later, maybe in the next one year.


Q: There is a GDP number due in a few days, what is your estimate for this quarter as well as for the year given that the capex cycle is still in contraction mode?

Chaudhuri: I would wait a little bit to give out the number at the moment. Let us talk of the capex cycle. The first capex cycle always comes first in manufacturing sector. We have not had much investment in the manufacturing in the last three-four years. We know that capacity utilization has picked up in many sectors. We could see some investment in manufacturing, which is not happening in a big way. Almost all investments are committed much earlier and they are being completed. So, if some manufacturing investment were to kick in later in this or the next quarter, I see that as a first sign.

I think infrastructure investment would follow only thereafter. It will also require some more ground work to be completed, in making investment less risk prone and more of a business deal. I think some more ground has to be covered on that. We have done quite a bit. There is some more to be done. If we can do that by the end of this fiscal, we could see some of the investment come back in infrastructure next year or maybe early next year. Earlier or before, if we can get some manufacturing investment off the table, that would set up a proper precedence with manufacturing kicking in first. Then maybe infrastructure will kick in, after six months.

Q: How do you see India’s growth story? Will it be more like 5.5 percent to 6 percent story for the next two-three years? Or do you think it could get better?

Malik:  For, anything between 6 percent and 6.5 percent, we would require more active government from a policy perspective. While everyone talks about reforms, the most compelling aspect of what needs to be done in the near-term, has less to do with reforms, just to get the decision-making machinery up and running.

This is where something like creation of a national investment board (NIB) could fairly play a constructive role. It can be done, even if it is not necessarily a panacea of all the problems plaguing the investment cycle. It is just the fact that there will be some tracking mechanism and greater accountability. This should have a positive impact. However, it should not be seen as a one stop shop for solving, all the investment problems of India.


Q: We are still in contracting mode. When do you see it getting into some kind of an expansionary mode?

Malik: We are currently in a protracted adjustment. A clear indication about investment picking up is not likely until Q2 of next year. You will begin to see the year-on-year (YoY) numbers becoming somewhat better in the second half of the current fiscal year. However, that is to a large extent the base effect coming through. It does not necessarily indicate any sequential improvement or conclusive evidence of a meaningful turnaround. It is going to be a slow adjustment process. Partly the political calculations are being made to be blamed for that.

Q: Even 6 percent to 6.5 percent some people believe will require much more from the government by way of action. What is your view? Do you think we are going to remain at the sub-6 percent base for a protracted period?

Chaudhuri: It will not be protracted. Anything could be worse. This is a season anything. There is enough scope for us to be able to do certain things and clear the air. If we are able to do that we could see next year being better certainly than this year.

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