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Dip in tourism to shave 0.5% from GDP: Omkar Goswami

Published on Mon, Dec 15, 2008 at 10:07 | Source : CNBC-TV18

Updated at Mon, Dec 15, 2008 at 15:45

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India's industrial output for October fell drastically to negative 0.4% against 12.2% clocked in the previous year. It is an absolute shocker from the economy as this is the first time since 1993 that the IIP has turned negative.

Commenting on the same, Omkar Goswami of CERG Advisory said November IIP numbers will be low as order books are shrinking across industries. Going forward, he expects IIP numbers to remain low.

Goswami said he has scaled down FY09 gross domestic product (GDP) growth target to 6.5-6.8%. Meanwhile, he feels travel and tourism will compress, and could shave off 50 bps from GDP growth. "Services growth won't be more than 8%, and growth in agriculture could be around 5-5.5%."

He feels there won't be adequate spending till June or July to keep the stimulus going. "The actual critical period will be starting from February 2009. Unlike China, India has a huge fiscal deficit. So, the stimulus package is not a thumps up. Also, government's efforts to pump-prime economy are constrained due to large fiscal deficit."

According to Goswami, all infrastructure spending will slow down the moment elections are announced. "No definitive list of key infra projects has been earmarked to continue despite elections."

He feels high capacities, interest costs, stagnant order books are prompting cost cutting in corporates. "The impact of this cutting will be seen by Q1FY10."

Here is a verbatim transcript of the exclusive interview with Omkar Goswami on CNBC-TV18. Also watch the accompanying video.

Q: Could you explain the reason for this and how much of the concern is security and is the terror finally going to effect Indian economy as well?

A: Given that services accounts for 55% of the economy, one of the fastest growing part of the services is the sub-sector called hotels, entertainment and tourism and that is going to compress quite a bit - at least over one- one and half quarters and it could actually have the potential of taking away 50 basis point of GDP growth alone between tourism, entertainment, hotels.

But, essentially the real problem now is that we are possibly going to have 5-5.5% growth in agriculture and when we multiply that by 18%, it is share of agriculture in the GDP.

Industrial growth and the IIP figures are now starting to show, we will be very lucky if we have 4-4.5% industrial growth year on year, probably around 4%. Multiply that by 27%.

Services sector growth is not going to be more than 27% and multiply that by 55%, so you are looking somewhere between 6.5% range. It is not the end of the world, but the compression from 9% to 6.5% which is 250 basis points is a serious compression on growth.

Q: How much of this is factoring in elections and the even risk that elections are because you believe that once elections are announced we are going to see a huge slowdown in government spending?

A: I am completely convinced about this and I don't see the government doing anything to prevent it. My view is that the moment elections are announced all infrastructure spending is going to slowdown.

Today you are talking of government package 1, package 2, etc., but at the end of the day we still don't have a list of say 25 key infrastructure projects and a commitment by the Prime Minister, by the planning commission, a discussion between them and a chief election commissioner that these are not going to be vote catching things, these are needed for the nation and we have to go forward with it. These 25 projects are a no-no and please don't stop us from getting into this and stop these projects once elections are announced, that hasn't happened yet.

I expect that the moment elections are announced, the ministers are going to go electioneering, the administration will go into holiday mode and till the new government comes in all the infrastructure spend is going to come to a health.

I believe that we a have got a really critical period in 2009, where starting from January or February right up to June-July we are not going to get spends that we need, to keep the stimulus in the economy.

Q: With regards to IIP Number- there was general consensus that October was a horrible month and maybe in that sense we were expecting to see a negative tick - how would you expect next few months to show up in terms of performance purely on IIP?

A: I can't say if November will be negative, compared to last years November or December will be negative compared to the December before. But it will be low, if you got 4-4.5% growth in November, December, January, I would say that is fantastic, I expect them to be lower than that. I don't know whether they will be in negative territory but they will be low.

The reality is that for a vast cross section of people in industry, they are starting to see their order books are shrinking.

Q: How bad do you think its going to get with the corporate earnings front? Ware you disappointed with the fiscal stimuli package and what that came by way of the entire infrastructure space?

A: You cannot be disappointed because at the end of the day you cannot go into a casino with Rs 5 in your wallet. The fact of the matter we have been running fiscal deficits, unlike China which has had a fiscal surplus or a balance budget, so there is only a limit to how much you can do and its na�ve to think that one can just pull yourself out of the problem. At the end of the day, whoever is going to look after the Ministry of Finance, including the Prime Minister will have to look at how much more rupees they have to print and how much government debt they have to take in order to maintain the fiscal deficit.

Once you get into large deficit mode, in order to pull the economy out is very difficult to get out of it, because it becomes habit forming, so there are constraints. It is too much to expect that this government is going to pump-prime left, right and center and pull the economy out.

So that is an issue; a) there are constraints. b) It takes a while, even if it were a big amount that they are putting in, it takes a while to work out to the system and just like monetary policy takes six months to work out through the system, fiscal stimulus also takes that amount of time. So, in the meanwhile you are going to see order books collapse. For example, suppose I had Rs 15,000 crore impetus for the automobile sector for that to increase into order books is going to take 3 months which basically means for the next six months auto ancillary are going to see order books collapse.

Q: You advice a lot of corporates on board of some companies, how are you seeing corporate India reacting to all of this?

A: The corporates are caught in a situation where four out of five have expanded capacities, because capacities were completely full, those capacities have come into play, higher interest costs have come into play, depreciation has come into play and the order book isn't increasing. It may not be shrinking, but it certainly isn't increasing, so they have decided to ruthlessly cut costs. The corporate sector particularly entrepreneurial driven companies know where it hurts, they have already started cutting costs and cost cutting is happening across the board.

Q: How long do you see before it starts playing out in quarterly numbers, the cutting costs that we are seeing across corporate India?

A: It is not going to play out immediately in the Q3 or Q4, but it will start playing out probably in Q1 of FY10 where you will see the impact of cost cutting coming in because those are lagged, they don't immediately work out. In the whole manner of cost cutting, of which reducing workforce is the last. You are trying to optimize the supply chain, you are trying to increase you productivity, and you do all the kind of things you can squeeze efficiencies out of.

The real issue to me is to try and figure out and no one really has a call of what the demand situation in India is going to look like in Q1 and Q2 of fiscal year 2010. If that again picks and tends to be on an upward move then it's just two to three quarters of pain and then we are okay. But if it doesn't pick up -- that has a lot to do with how credit and finance happens in India and in the rest of the world. It has also lot to do with how bankers open their purse strings here, however bankers are only talking, they haven't opened the purse string, they are still taking money at 10.5%, and still say that PLR is still very high and they are anyway not lending. Until all those things come into bare, it's difficult to say how Q2- Q2 of FY09-10 is going to workout.

I am hopeful that some sanity is going to happen in the banking sector because right now they are insanely risk averse. Somewhere some sanity will happen and the credit crisis and liquidity crisis globally will ease out by March-April next year.