Taimur Baig of Deutsche Bank expects the current account deficit (CAD) to remain at 3-3.5 percent for two years. Recently, the government pegged that the current account deficit during this fiscal to be at 3.5 per cent of the GDP, which was much higher than expected levels.
Like many others, Baig doesn't expect the central bank to cut interest rates in its December policy. "RBI has been giving signals that it wants to cut interest rates in the first quarter of the next calendar year," he elaborated.
Below is the edited transcript of his interview to CNBC-TV18
Q: What is the sense you are getting, will we have more quarters of sub 5.5 percent growth? What's the trajectory for the next two-three quarters?
A: In October-December we will have another sub six percent growth. I am not sure about sub 5.5 percent growth, but the conditions are in place for a mild recovery from January onwards.
Whether it is the external demand pull or expectations of monetary easing in early next year, these coupled mild move towards reform initiatives, one can expect growth to hit towards 6 percent if not a little higher by the first quarter of the new calendar year. But, the October-December quarter is going to be still firmly in the sub 6 percent area.
Q: What do you think will be Reserve Bank of India’s (RBIs) reading of the Q2 FY13 GDP numbers? What do you expect them to do in the December and the January policy?
A: Given the statement that came out in end October, the RBI is very keen to come up with supportive policy measures. If anything they can do beyond cutting interest rate, they have already done, like lots of cuts in CRR and aggressive OMOs. So, from that point of view there is no doubt that the RBI is waiting for a couple of more data points so that can go ahead and start cutting rates.
It may not be December given that growth exactly did not collapse in the July-September quarter. Anything that is coming on the inflation side gives an additional room for being complacent. The central bank has been giving signals that it wants to cut interest rates in the first quarter of the next calendar year.
Q: How are you reading the core sector number for October? Are you getting a sense that we could see some kind of pick up in activity on these lines in the months to come?
A: We have to take several months data together, given how volatile this core data and the overall industrial production has been in the last couple of years. Even if you take on three month moving average basis, correlate this core data with what's coming out of the PMI side on manufacturing, the ground is set for a pretty decent single digit growth number for October industrial production, perhaps somewhere in the 5-6 percent range. From that point of view, are seeing some upward momentum in the economy. There really is no major shock in the pipeline to think that it could be unraveled anytime soon.
Q: What are your estimates with regards to the current account deficit (CAD) as well as the fiscal deficit? The Foreign Institutional Investor (FII) debt limits are raised by USD 10 billion. How much do you think it will be with regards to a reprieve to the CAD? What sort of estimate would you be working with on FY13 as well as for fiscal deficit?
A: We always talk about these twin deficit issues for India. On fiscal side, I suppose we will end FY12-13 in the range of 5.5-5.6 percent. So, there would be more slippage from what the authorities have been suggesting but not a major slippage. Going to FY13-14 the authorities will probably come up with a budget aiming for about 0.5 percent of GDP consolidation. It will be in the low 5 percent range or may be little below.
I suppose, we will have to live with this 3.25 percent of GDP worth of current account deficit for the next couple of years. Given the fact that, how strong import demand is. We are not expecting a collapse in commodity prices. However, it is the third deficit that really matters. This is the financing of the deficit and Balance of Payment (BoP), it cannot be in deficit territory.
There has to be more capital account measures to bring in flows and investment friendly initiative taken by the government. This is to let the money come through the FDI or FII channel. This is a big challenge for 2013. The authorities need to make sure that the current account deficit which in my view is here to stay, is financed in orderly manner.
Q: The flows have been excellent but the deficit has been widening, how do you think this year will end?
A: The September and October trade deficit number were particularly worrisome. In just two months, we had USD 40 billion worth of trade deficit. No matter how strong the flows are, it is difficult to finance that kind of hole in the current account on a regular basis.
The economy is also showing signs of turning around. This means even capital goods related inputs will also be strong. Hard to see how the current account deficit comes under any sort of correction. So, the burden remains on financing the current account, as opposed to expectations of the current account correcting itself.
Q: Do you worry that the rupee is in for more shocks? Would you worry that we are going to get to 57/USD plus in the first six months of next year?
A: It is very hard to be constructive on the rupee in a very comprehensive manner. We do expect chronic CAD to stay. We have seen the rupee rally in the last few months have been more sentiment driven, than actually supply demand of dollar being favorable towards the rupee. So, from that point of view, as long as the authorities do a few good things here and there, the markets will cheer and will see episodic appreciation of the exchange rate. The flat trajectory or some depreciation tendency is what we should be expecting in 2013.
Q: From an economic standpoint how closely are you watching the parliamentary proceedings? What are the key triggers or factors that you are going to be watching out for considering that we do have the debate and voting on FDI in multi-brand retail which is coming up?
A: In terms of tangible progress out of this parliament session, my expectations are very limited. I am trying to construct a scenario for 2013, where one can be constructive on growth even without any major policy initiatives taking place. That can be constructed even without expecting major parliamentary decisions.
For example; we can expect a bottoming out of external demand or the RBI rate cut to help investment sentiment. We can also expect consumption to remain resilient, given how strong wage growth has been in both rural and urban India.
It would be nice if the parliament comes up with some positive surprises. Even if they did not come up with anything major, economy can still shrug itself at least in 2013 and move forward.
Q: What's your GDP for FY14?
A: It is all relative. A couple of years ago forecasting 6-6.5 percent would have been a very pessimistic number but now that's an optimistic number.
Q: So that's 6.5 percent for you in FY14?