The year 2012 may have been the year with the slowest growth in a decade, with GDP likely to have clocked an average of 5.3 percent. A CNBC-TV18 poll indicates that 50 percent of the economists expect growth to have troughed in the second quarter, while 50 percent expect it to trough in the third quarter.
Around 50 percent of those polled see current year growth at 5.2 percent to 5.4 percent while 50 percent see it between 5.5 percent and 5.8 percent. As for next year, 80 percent of those polled see growth a good one percentage point higher between 6.2 percent and 6.5 percent; while 20 percent see it at 6 percent and below.
If growth will snake up what will inflation do that's the happiest part of the forecasts. Around 70 percent of those polled expect inflation to be at 7 percent or lower by March end. Around 30 percent see it above 7 percent in March.
As for FY14, 40 percent see inflation averaging between 6 percent and 6.5 percent; 50 percent see it averaging between 6.5-7 percent, only 10 percent see it above 7 percent in FY14. With inflation down to 6.5 percent, all those polled expect a slew of rate cuts. Around 40 percent expect repo rate to by cut by 75 bps in 2013; 40 percent see a 100 bps cut next year.
A minor, 20 percent see only a 50 bps cut on the external front all of them see the rupee stable between 53-54 by March 2013; in the remaining three quarters, 60 percent continue to see the currency stable between 52-55 to the dollar while 40 percent see a depreciation towards 57.
As for the current account deficit 50 percent believe it will be at 4 percent of GDP or higher in FY13; while 50 percent say it will be lower than 4 percent; every one sees the cad lower in 2014 by at least 40 bps as for the fiscal deficit, 20 percent see the deficit at 5.5 percent this year i.e FY13; 40 percent see it at 5.6 percent of GDP and 40 percent see it between 5.6 percent and 5.8 percent of GDP, importantly no one expects it to at the finance minister's forecast of 5.3 percent.
For the next year everyone see the deficit lower by at least half percentage point. 40 percent see it at 5 percent or lower; 40 percent see it between 5.1 percent and 5.3 percent and 20 percent see it between 5.4 percent and 5.5 percent.
The poll indicated that inflation rate and GDP rate will probably be at 6.5 percent or thereabouts in 2013. Also the two deficits, fiscal deficit and current account deficit will be about 0.5 percentage lower in FY14 than it was in FY13. To discus the implications of these developments, Saumitra Chaudhuri, member, Planning Commission, SS Mundra, executive director, Union Bank and A Prasanna, chief economist ICICI Securities discuss their view on the topic.
Below is the edited transcript of the interview.
Q: For the past three years inflation has been a good one to two percentage points higher than the GDP growth rate. We understand from the poll is that in 2013 calendar both may converge at about 6.5 percent. What will be the macro economic implications of this development? Would that be a positive development?
Chaudhuri: Easing off of inflation is a positive development. Inflation has been extremely recalcitrant and difficult to handle especially since it has come from primary commodities in the first part of the inflationary period. We have now covered three years.
It is extremely destabilising and has been a disincentive for any economic activity whether it is consumption or investment. Inflation has also led to significant amount of monetary tightening. A relief from inflation would be a true relief. I agree that inflation seems to be coming off, if it stays around 6-6.5 percent next year then it would be positive for the economy as a whole.
Q: The fact that inflation might be below or at the same rate as GDP growth. Does it per se have any significance and separately are you also confident that inflation will be able to mellow down in FY14?
Prasanna: I am not sure numerically if inflation is below, above or at the same level as growth rate as it has any implication. In terms of investment allocation, high inflation does affect investment choices between financial assets and fiscal assets. So, from this perspective inflation moving down is good news for investment allocation.
On inflation per se, I also expect it to come down but I still see some upside risks because of administered prices in India, Budget pressures and other issues one can see some prices going up during the year. So, these are some upside risks to a sanguine view on inflation.
Q: Will savings be a problem? Response for the various tax free bonds, REC, PFC and IIFCL, at 7.8-7.9 percent it has been very bleak. Clearly, there is an savers psychic of high inflation and therefore 7.8-7.9 percent is not seen as enough as a longer term tax free rate. Do you expect that you will encounter this problem in 2013, of depositors simply not biting if you reduce the deposit rates?
Mundra: There are many elements to it not only the saver behaviour across the country. One or two decade back, the household used to be the biggest saver with the banking system, now during this period the large part of saving started to flow from institutions, various government organisation and bodies. One should be aware of this element. The saving behaviour and pattern of rural and urban metro cities is very different.
If we are looking at a inflation rate in the next fiscal in the range of 6.5-7 percent then it denotes that interest rates may not touch those low levels which they touched three or four years back, but they would be lower than what they are prevailing today. We have already seen in the recent past that there has been some softening of rate of interest.
Another view is that, the cash benefit transfer is at a very nascent stage, but I believe that as this process stabilises and as this moves across the country a large part of saving which otherwise was not coming into the banking system and which was more in the nature of cash economy it will start trickling into the banking system. It will have a very important impact on the overall saving pattern in the banking system in next three years.
Q: Our poll indicates a benign fall in current account deficit by about half a percentage point at least in the coming year. Would you share that optimism or would you worry that three years of inflation being much higher than our own trend and much higher than our global competitors could actually have ruined the competitiveness of our exports and current account deficit would persists as a problem longer than we now believe?
Chaudhuri: The current account deficit stands extremely high, it's likely to be over four percent in the current fiscal. Even if come off by half a percentage point of GDP it would still be in extremely uncomfortable range. I think that there would be some easing, but not very sure to what extent it would be. One big question would be, to what extent the import of gold would even out. If it falls off, it's fallen off a bit this year; if it falls off a bit more next year then current account deficit is likely to fall.
A certain part of it is exports; exports are not growing because of competitiveness issues and contraction of traditional markets like Europe. If you look at the world economic outlook, October numbers predicts half a percent growth for the euro zone is likely. In January when they put out an update it may be zero or even negative, so, in this situation our exports are facing shrinkage of demand rather than just price pressure.
I am not very sure if the situation will significantly alter next year, may be in the second half, it may not be in the first half, but I think if oil prices don't rise any further, service sector exports do show some amount of growth and if gold comes off a bit then we are looking at a better current account deficit but even then it still will be in uncomfortable territory.
Q: The poll indicated that fiscal deficit would be at least half a percent lower than the current year. The best figure was 5.5 percent and many are expecting 5.8 percent. However for next year the highest figure was 5.5 percent and the lowest figure was at 4.8 percent. If the fisc once again behaves recalcitrant then do you think that the sustainability of growth is going to be jeopardised?
Prasanna: If deficit doesn't come down, then there will be more government borrowing and it can crowd out private sector borrowings. Even if there is some monitoring easing in margin, it may not benefit the economy, the interest rate structure will not come down.
For medium term inflation, it could mean that again inflation expectations will continue to be high as it is logical to expect that if the government continues to run high deficit then the only way you can square it is by allowing higher inflation if the government keeps running up debt. So, in theses two ways it can affect the macro and it will have effect on growth prospects.
Q: Can the fisc put page to a sustainable growth from FY14 onwards. The expectation is that it will hopefully be lower, but if it refuses for political reasons or otherwise to behave itself do you think it can be an extremely costly lapse?
Chaudhuri: Fixing the fisc is a sine qua non of getting growth back. It has to be done. First let us see what happened this year. I noticed that in the poll nobody thought that the government would be able to meet its target of 5.3 percent; it's a revision from 5.05 percent that was in the Budget.
If you look at the last year’s revised estimates and the provision of actual's then we can see that the subsidy bill for the principle subsidies, oil, fertilizer and food is Rs 61000 crore less in provisional actual's compared to revised estimates. The total expenditure is only lower by about Rs 10000-15000 crore. It has two implications, which the big subsidy pile up in the first six months of this year is on account of payments that were to be made last year but weren't made the last moment.
The fact that expenditure of other varieties were made last year means that though they were budgeted for in this year, it may not happen. If you look at the numbers, if you look at what is non-interest, non-planned, non-subsidy revenue expenditure is lower by one and a half percent up to October.
So, instead of moving it forward for the rest of the year, I think this is not something quite well understood what's happened. People looked at the big pile up on non-planned revenue expenditure in the first half of the year but many people didn't really notice the difference between the provisional actual's and the revised estimates and why they varied so I am confident that government will be able to meet its target of 5.3 percent.
The importance of meeting the fiscal consolidation to growth has been brought out by experience in the last two-three years, that without fiscal consolidation we will not be able to push investment up particularly in infrastructure space which is a absolute must.
The character of growth in last two, we had 8.5 percent growth after the crisis and the years that came before the crisis the main variation is where has the growth come from? In the more recent period growth hasn't come from investment, therefore it petered out last year and this year.
So, if you want to bring investment back without consolidation of the fisc, it will not happen. So, that is absolutely important. We are looking for 5.3 percent, next year I don't know how much more it can be brought down by, but I think that path would certainly be taken.
Q: The poll indicated that GDP next year will be at least one percentage point higher than the current year, are you getting any telltale signs of greater interest in loan inquiries or any improvement in loan growth on the ground?
Mundra: We may end the financial year 2012-2013 with a growth rate of 5.6-5.7 percent but there has been couple of important recent developments like announcement of various government in last few months and formation of Cabinet Committee on Investment (CCI). Growth in last two-three years to a large extent was driven by investment in infrastructure. I think there will be dearth of demand and absorption in basic infrastructure, power, roads, ports, telecom and housing in the economy.
With positive sentiments coming in, strong measures and all other factors, I expect industrial growth to pick in FY 2013-14. So while we end the year at around 5.6 or 5.7 percent maybe in the Q1 itself we can see the growth crossing 6 percent and inching up by the time we reach to Q4 to maybe crossing above 7 percent and thus give us an average during the year, which could be in the range of 6.5 to 7 percent.
Q: Do you think 6.5 percent would translate into 7-7.5 percent in the years to come or do you think sustainability of growth is still a question mark?
Prasanna: I am confident that we will mature and 8 percent should be the aspiration rate and we will proceed towards that. Obviously it is not a given, we have to get the micro right and the policies right but I think there is a willingness to do that and investment demand cannot be subdued forever. There will be a level of pent up demand which will get unleashed. I do not know whether it will happen in next year or probably the year after but I am reasonably confident that we will move ahead in terms of growth.
Q: Will 6.5 percent be the start of a sustainable growth that will go on to 7-7.5-8 percent?
Chaudhuri: I think next year growth will be over 7 percent. We will get a better idea of it by the end of the quarter ended March and thereafter next year will be a consolidation process. We need to bring investment back on track and a significant acceleration can only happen the year after that.
I think with eight percent in unsettled global circumstances is possible provided we get a homework right, something more than that is possible if the global circumstances are more supportive. Right now they are not and we should target for 8 percent, as and when they become more supportive or supportive they will become eventually I think we will be able to do better.