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Mar 07, 2013 03:38 PM IST | Source: CNBC-TV18

Rate cuts alone won't fuel growth, see FY13 GDP at 5%: HSBC

Leif Eskesen, chief economist - India and ASEAN, HSBC says, on CNBC-TV18, that growth not by fiscal or monetary easing alone but with structural reforms

Leif Eskesen, chief economist - India and ASEAN, HSBC says the fall in February PMI may be due to cuts in government spending.  He warns of a sub-5 percent GDP growth in Q4FY13.  "I see FY13 GDP growth at around 5 percent," he says on CNBC-TV18.

The economist adds that the RBI is likely to cut rates by 25 bps in the upcoming policy announcement on March 19 and calls for structural reforms to boost the revival in growth. Eskesen points out the fiscal and monetary easing alone is not enough to stoke growth.

Below is an edited transcript of the analysis on CNBC-TV18

Q: What indicators did you observe in the services PMI and what do the internals look like for this month?

A: The services PMI indicates a slowdown in the pace of growth in February led by slower growth in recording new orders effectively. So there is bit of a deceleration on that front but the reason for that could be related to the government cuts in spending in the last few months of the fiscal year.  The services PMI also reveals an increase in inflationary pressure due to the increase we in wages, raw material prices and diesel prices that have been passed on to final consumers.

The average PMI reading for services in January-February as compared to the average in October-December quarter, has actually picked up. So overall there is a stabilisation in growth and emergence of a gradual recovery on the back of the PMI readings this week after the services PMI as well as the manufacturing PMI.

Q: What indicators do you expect from the fourth-quarter GDP data? The third-quarter GDP data was a bit of a shocker. Do you expect the GDP for the fourth quarter to be at sub-5 percent?

A: It is quite possible that the GDP growth might be sub-5 percent in the final quarter. But in sequential terms, we expect a recovery in growth in the final quarter. So quarter-on-quarter, there should be an increase in growth. But the PMI data has indicated that the fiscal will look firm on the sequential side. But it is possible that is not enough to put growth above 5 percent. So, the full year fiscal outcome is probably going to be around 5 percent.

Q: So what do you expect from the RBI when it announces the monetary policy on March19?

A: We are expecting a rate-cut of 25 bps on the back of a relatively slow pace of growth and deceleration in inflation over the past few months. The RBI could announce a cut in interest rates with the government’s focus on fiscal consolidation which was at the core of Budget. Overall, the scope for monetary easing remains quite limited.

Q: Part of your observation on the PMI data indicates signs of inflation accelerating in manufacturing and in services. How easy do you think this will make policy-formulation be for the rest of the year as the Reserve Bank is expected to go hammer and tongs on rate-cuts?

A: There is simply no room for that. The reason these underlying inflation pressures still brewing is due to the government’s recent upward adjustment of diesel and other administered prices that have been kept artificially low because of the subsidy in place.

These underlying inflation prices also seem to indicate the sort of overall relatively tight capacity in the economy. Service-businesses still find it difficult to meet orders or backlogs while manufacturing businesses are still struggling to keep up with demand.

So the backlog of projects is on the rise. The supply led slowdown in growth has hardened overall inflation pressures relatively firm and that’s why ultimately, it is important to improve the growth-inflation tradeoff in India. This cannot be done by easing fiscal or monetary policy. The economy needs structural reforms to revive the supply side.

Q: Taking another GDP growth rate of sub-5 percent as cue, how long will it take for an economy to start recovering and record higher growth?

A: It depends on the nature of the slowdown. Cyclical slowdowns on the back of the external shock or potentially tightening of fiscal and monetary policy will result in a recovery in growth over two-to-four quarters.

But, the slowdown in India which is much more structural in nature and due to supplyside constraints then the recovery is a protracted. Setting right the economic structure that takes time. It also depends on the pace of the announcement and implementation of policies which has currently moderate. I think it will probably be three years for growth to return to the 8-percent trajectory.

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