Recovery in India is very mild & not exciting: Jahangir Aziz

JPMorgan India Investor Summit 2017 kicks off in New Delhi today. In an interview to CNBC-TV18, Jahangir Aziz, Head of EM Asia Economic Research at JPMorgan decodes market metrics from the sidelines of their conference.

Emerging markets are relentlessly slowing down since 2012-2013. India did reasonably well till 2015-end. Then they took off and we have been going on the other direction. The biggest factor is that India hasn’t managed to get onto that boat where the tide is lifting all the boats, he said.

The reason why India could not get on to the global trade recovery is that globally we have massive amount of excess capacity and we need to go two steps ahead if we are going to take market share away from the usual suspects, China etc. that is where the problem has been that the cost of doing business hasn’t come down in India, he added.

On the fiscal side, the space is very limited. Central government has been consolidating maybe not at a pace at which we had thought they would consolidate but it has been consolidating. State and central combined fiscal deficit hasn’t moved from 7 percent of gross domestic product (GDP) over the last years, said Aziz.

Recovery in India is very mild and modest. It is not a recovery that people would get excited about. Both on the monetary policy and the fiscal policy side, I don’t think Indian government have that much of space, he further mentioned.

Below is the verbatim transcript of the interview.

Q: The million dollar question which even Sunil Garg referred to, when do you think growth is ticking up, gross domestic product (GDP) first and then earnings?

A: It is a much more complicated issue than we are making it out to be. Let us look at first the global background. We had emerging market countries from around 2012-2013 onwards relentlessly slowing down. At that point in time, India was recovering from the 2013 taper tantrum. We did reasonably well till about the end of 2015.

Q: But then they took off?

A: That is the point, the point is that then they took off and we have been going on the other direction. Now there are two parts to it, obviously there are domestic factors, but I think there is another bigger factor which is that India has not managed to get on to that boat where the tide is lifting all boats and India is being left out and the question is why is India being left out in this surge, essentially in exports.

With global trade recovering, I think that is a far bigger question than we are giving credence to and we are looking much more and saying okay fine there these domestic issues, the demonetisation, Goods and Services Tax (GST) which I don’t believe the GST was a cause, and we are sort of saying that, that is the reason and therefore the recovery is going to turn around.

Q: Why do you think we could not get on to the global trade recovery?

A: I think there are a variety of reasons but the largest reason is, look around the world at this point in time, look at the massive excess capacity in global manufacturing. There is enormous amount of excess capacity. Every manufacturing item has been dis-inflating and there are no real signs that anything manufacturing is picking up except for ingredient which is memory, DRAM prices, that is the only thing that has picked up.

Everything else has been essentially commodity prices and commodity related manufacturing like chemicals, etc. that has picked up and that is where the issue is that we and globally we have massive amount of excess capacity in a world where there is dire amount of excess capacity, we really need to go two steps ahead if we are going to take market share away from the usual suspects, China and etc. and that is where I think the problem has been that the cost of doing business still has not come down in India.

Q: Every other day we are reporting that there is a high level meeting to stimulate the economy and now I can understand the anxiety in the government as well because it has only 18 months to end of renewing your work permit. What can the government do, what would you expect as an investor?

A: On the fiscal side, the space is very limited. So let us talk about the central government. The central government has been consolidating, maybe not a pace at which we had thought they would consolidate, but it has been consolidating.

Q: But consolidation means less stimulus.

A: True but the entire consolidation of the central government has been more than offset by the profligacy of the state government. Look at the state and center combined fiscal deficit. It has not moved from 7 percent of GDP over the last three years and if you take away the last quarter 5.7 percent growth rate, the average growth rate has been 7.5-8 percent. Let us not go into the Central Statistics Office (CSOs) statistical problems but let us take at face value, 7-8 percent and the average price of oil was around USD 40-45 per barrel in the last three years.

So, if the average price of oil is USD 40-45 per barrel, growth is at 7-8 percent, if India cannot overall reduce its fiscal deficit from 7 percent to anything less, means there is enormous amount of fiscal stimulus already in play. So now you are going to add to the fiscal stimulus, what are you going to achieve because with that fiscal stimulus you got 5.7 percent and growth has been slowing down for the last four quarters.

Q: Let me come back to my first question, when are you seeing things recover at all, is it going to be five point something for second and third quarters as well?

A: We are looking for recovery starting in the third quarter of the calendar year but the recovery is very mild, very modest. It is not a recovery of the kind that people would get excited about. Again, leaving aside the statistical anomalies, I think the question is what is it the government can do, both on the monetary policy and the fiscal policy side. I don’t think they have that much of space.

Q: No space on monetary either?

A: Look at the new inflation numbers that came out. If you look at the core inflation pick up that is taking place, some of it is due to GST, I am not denying that and the Reserve Bank of India (RBI) is going to see through it i.e. the RBI is not going to hike. However, look forward to let us say first quarter of 2018 which is where the inflation targets, the way in which we should look at inflation target, it is very difficult to see at this space that in first quarter of 2018, inflation will be comfortably below 4 percent.

We actually have inflation above 4 percent. So, yes there might be some space you can squeeze out from the RBI, but it is not really going to make any dent into demand of the kind that you require. We require a massive easing cycle; that is really not the situation.

Q: Are you worried about the current account deficit at 2.4 percent or is that at least par for the course?

A: The 2.4 percent by itself is fine because we have gone through 5 and 4 and 7, etc. so for us it is okay. The problem is that what is driving the increased current account deficit, it is non-gold, non-oil imports and that is where the concern is. The concern is that when -- we all thought that the demonetisation would have a demand impact. The demonetisation did have a demand impact, we all thought that the demonetisation demand impact would be temporary and demand would recover as the liquidity were filtered back into the system.

Demand has recovered, but this time around the demand is not being fulfilled by domestic production. Index of Industrial Production (IIP) has not picked up, instead that demand is being fulfilled by imports. So it means that apart from the demand shock, the fears that we had back in November, that demonetisation could also have a supply side impact, it is probably true, at least that is what the data shows.