After poor industrial production data that came in on Friday, C Rangarajan, Chairman, Economic Advisory Council to the Prime Minister of India (PMEAC) says industrial output will pick up in H2FY14.
In an interview to CNBC-TV18, Rangarajan says the various reforms (easing FDI caps, regular petrol/diesel /gas price hikes, etc) taken by the Government to boost the economy and the sentiment around it, will reap benefits in the second half of FY14.
He continues to believe that GDP will grow at 6 percent in FY14, but would remain slack in the Q1FY14.
Inspite of the weak macro data hurting sentiment, Rangarajan adds that investors will continue to find India to be an attractive investment option.
"The US economy has shown some recovery, but there is still a long way to go before it can be called a good recovery and therefore the QE may continue during the course of the year. Therefore, I believe that the capital flows will resume after the impact of the Fed statement fades off," he adds.
Below is the edited transcript of Rangarajan's interview to CNBC-TV18.
Q: The Index of Industrial Production (IIP) numbers for the last couple of months have been tepid. It is a volatile data point, but do you think there is some kind of downside risk to Gross Domestic Product (GDP) estimates for FY14 on the back of such tepid numbers?
A: The IIP numbers in the last two months have not been as encouraging. Infact, one had expected a pick up in the month of May, but it did not happen. It covered a very wide segment of industrial production. The impact of the various measures that we have taken in the last 6-7 months would be felt in the course of the year, particularly in the second half of the current fiscal.
Therefore, I expect a pick up in industrial production, particularly in the second half and there is a conscious effort to achieve the production and capacity creation targets in the key infrastructure sectors like coal, power, roads and railways. Frequent meetings are being held in order to overcome the constraints and difficulties. The public sector investment and production will act as a simulative economic growth in the current fiscal. I still expect the growth rate during the current year to be around 6 percent.
Q: Just for the first quarter though do you think one should be braced for disappointments because of this trend on IIP? We have sub-2 percent for one month. We have degrowth for another month. Do you think the first quarter is going to be more prickly than people expected?
A: I think the first quarter is not going to be good. We have the data for the first two months and taken together it is only a very, very marginal increase. Therefore, we should not expect any strong results for the first quarter. My surmise is that the pick up will happen to some extent in the second quarter, but more particularly in the second half of the fiscal.
Q: Earlier, people were expecting that we will get some help from monetary policy in trying to stimulate growth. Do you find that the Reserve Bank of India (RBI) would be extremely constrained now from hereon to be cutting rates given what the currency has done, given that Consumer Price Index (CPI) inflation is still quite sticky?
A: These are forces operating in opposite directions. The slowdown in growth would require that we take some action to ease monetary policy, but on the other hand inflation continues to remain high. The retail inflation data which came a few days ago is somewhat disappointing. In the meanwhile, the currency has come under pressure, therefore, these are opposite factor pulling monetary policy in a different direction. Infact, even on the last occasion, the monetary policy stance was largely determined by the external sector considerations. Therefore, going ahead I think much will depend upon what happens to the pressure on the rupee.
Q: There is also an extremely weak export figure that we had to deal with on Friday. Are you getting worried that both legs in terms of what is happening with domestic demand pick up as also this exports disappointment is actually accelerating?
A: The trade deficit came down in June considerably as compared to the previous month. That was largely due to the decline in the import of gold. But we should expect some adverse impact on exports, since the advance economies have not shown any recovery. However, if the expectations are to be believed, the growth rate in the US is expected to be somewhat higher during the course of the year than last year. Therefore, we can see a pick up in exports later.
We really need to diversify our exports towards those countries whose growth rates are on the rise, but we should not draw any lesson from what we have seen in the first two months as far as exports are concerned. We can see some pick up in exports partly because of the depreciation of the rupee and partly because of a better performance of the US economy in the later part of the year.
Q: What about the financing of the deficit that we are running? That is the one thing which people are getting quite unsure about on whether flows in the context of what is going on with global liquidity will be enough to cover up that whole of anywhere between USD 70-80 billion that we could still be staring at this year?
A: Last year, it was possible for us to finance Current Account Deficit (CAD) of almost about USD 84 billion. The capital flows were adequate to cover the CAD and we did not drawdown the reserves. Therefore, we were able to overcome the situation because of the substantial capital flows. As far as this year is concerned, the month of April seemed to be alright and May also seemed alright, but in June, we had a very substantial outflow of capital.
To some extent these are the overreaction to Fed statement, but that has been corrected since then. Therefore, I believe going ahead that the capital flows will resume. The Quantitative Easing (QE) will not taper off that easily. The US economy has shown some recovery, but there is still a long way to go before it can be called a good recovery and therefore the QE may continue during the course of the year. Therefore, I believe that the capital flows will resume after the impact of the Fed statement fades off.
Q: While we have no control of what may happen in the US, do you think more steps could be taken then to encourage capital account flows? The truth of the situation is that there is a great deal of dependence on these kind of portfolio inflows. Can anything be done to augment or bring back the capital inflow interest because we have seen very sharp outflows especially from the bond market this time?
A: Yes, there has been a very significant outflow. In the month of May, there was an inflow of USD 5 billion and in the month of June, there was an outflow of USD 7 billion. This is the turnaround of almost USD 12 billion and this had the impact on the rupee.
Financing the large CAD is an immediate and short-term problem, but foreign institutional investor (FII) flows though volatile in this sense of the term from month-to-month can resume in the coming months, that all depends upon the impact of the QE.
If that continues, I would think that the investors would still find India reasonably attractive investment destination. There are very few countries in the world which are growing at the rate of 5-6 percent in the current situation. Most of the Brazil, Russia, India, China and South Africa (BRICS) countries except for China are all well below this rate of growth.
Therefore, much depends upon the pick up in the capital flows. Alright, it is also possible to raise additional capital through some of the measures that we have taken earlier like the Non-Resident Indian (NRI) bonds. While this is an option that we should not rule out, but we must choose the right timing and I believe once the currency stabilises somewhat we can go in for raising foreign exchange through NRI bonds.
Q: Some emerging market (EM) central banks have even started toying with the possibility of affecting interest rate increases. How soon is it where we could be presented with a similar fate with the way the currency is going out here? Do you think we will be talking far less about interest rate cuts as the year progresses?
A: The problem is twofold. On the one hand the CAD is high and the capital flows are slowing down and therefore this puts pressure on the rupee. On the other hand the economy is also not doing as well as we expect it, even though there maybe a pick up in the second half and therefore that requires stimulus. So, our situation is somewhat different at the moment, but I believe that the monetary action is something that will be decided as we go along taking into account the factors operating on the two fronts.