India's gross domestic product (GDP) is estimated to grow annually at 5 percent in fiscal year 2012-13, a government statement said on Thursday, citing provisional estimates. The latest estimate is the worst of all growth projections issued by the government and the RBI. Last month, the RBI had pared the GDP growth estimate for the fiscal year ending in March to 5.5 percent, the worst since 2002/03.
Samiran Chakrabarty of Standard Chartered Bank believes the slowdown in the service sector is to be blamed for the dismal GDP figure, which is much lower than the market estimate of 5.4 percent. Sluggish growth of the FMCG space has also contributed to the GDP figure, he feels.
Sajjid Chinoy of JP Morgan however, is not surprised with the figure as they were expecting the GDP estimates to be around 5.2 percent. But, he is more worried about the composition of factors that led to tepid growth. "What surprises me is the composition because in my view, a lot of the slowdown is because the government has slammed the breaks on government spending over the last three months. Year on year spending has contracted by 10 percent as opposed to a growth rate of 15 percent the previous quarter," he added.
Here is the edited transcript of the interview on CNBC-TV18.Q: Are you shocked with the 5 percent GDP figure?Chakrabarty: Yes definitely. It seems that the service sector slowdown has been much higher. One possibility that I can imagine is the community and personal services is component of the services where the government’s revenue expenditure is one of the big drivers. We have seen that there has been a very substantial decline in that.
It could be a reflection of that showing on this 5 percent GDP growth print but, needless to say, this is way below what the market was expecting and even lower than market estimates of 5.4 percent.
Q: Back of the hand calculation indicates that one quarter could possibly come in as low as 4.2 percent and then the subsequent quarter could come in at 5 percent. Would you be that pessimistic assuming that one quarter could actually come in at around 4.2 percent for possibly Q3 or Q4?Chakrabarty: All of us will have to go back to our drawing boards to look at the Q3 and Q4 numbers based on these estimates. I completely agree with Dr. Sen’s point that Q4 is basically a guesswork on Central Statistics Office’s (CSO) part. But, my sense is that the services slowdown is also reflecting a slowdown in consumption which we have been seeing in the quarterly results of a lot of Fast Moving Consumer Goods (FMCG) companies.
If that trend is continuing here as well, then we might have to relook at the quarterly GDP numbers for Q3 and Q4. It is needless to say that the first half average was 5.4 percent and it is quite likely that the next half will have a below 5 percent print if the overall annual average has to be 5 percent.
Q: It is 5 percent. Do you say the CSO is wrong or will you go back and recalculate your numbers? Chinoy: Our own estimate was 5.2 percent, so we are not that surprised by the 5 percent figure. Remember the previous year’s number got revised up, we had 8.4 percent going to 8.6 and 9.4 percent. If you look at the level of GDP in constant prices in 2012 March, it was slightly higher than what was previously estimated.
So if you assume the same momentum this particular fiscal year, you will get some reduction in the year on year rate. You can take about 10 basis points off. So effectively our number of 5.2 percent was 5.1 percent.
I am not surprised by this number at all. We have had a year where we had a sub-par monsoon and agriculture will get affected. What surprises me is the composition because in my view, a lot of the slowdown is because the government has slammed the breaks on government spending over the last three months. Year on year spending has contracted by 10 percent as opposed to a growth rate of 15 percent the previous quarter.
I expected that a lot of the slowdown would be because community, social services would grow much slowly. In fact, they showed a growth rate acceleration of 6.8 percent. The composition is what worries me. But, the overall number being close to 5 percent is what we have been expecting for a while now.
_PAGEBREAK_
Q: Does the RBI know more than it is revealing? Does it perhaps expect a slightly more dismal picture and that is why it went with that double dose which probably nobody in the street was expecting?Chinoy: Two thoughts. One is that the RBI estimate came out before the revisions were made. Firstly, the YoY number will have to be marked down, given the change in the previous base. Number two, there is a fair degree of margin of error here.
If you remember what happened last year, the advance estimate was 6.9 percent and the actual number in May was 6.5 percent and then the revised number was 6.2 percent. Given that there was a 70 basis points shift, I would not overly fixate on the 5 percent number. I think there is a margin of error here.
We still have a lot of data to come out. Almost nothing has come out for Q1. The larger message here is twofold. Whatever the number, whether it is 5 percent or 5.5 percent, this should be the slowest growth rate in a decade and number two, this is largely still a consumption growth economy and there is no evidence that fixed investment or investment growth more generally, has picked up. I think that should be the source of concern. It is the composition of growth more than the actual number that matters for policymakers now.
Q: A two part question, the Q3 FY13 GDP data will be out on February 28. One, what would your estimate be for that, what would your estimate be for Q4 FY13 in terms of separate GDP numbers? And two, how exactly would you read FY14 GDP? Would you expect a pickup from that 5 percent or even 5.2 percent?Chinoy: In terms of Q3 of FY13, I think we will get a number at either 5 percent or sub 5 percent. We are working with a 4.9 percent number because two things happened in that quarter. One is the full impact of the sub-par monsoon will show up in those numbers and two, that is the quarter in which government spending came to a standstill. So we will find a pretty weak services number.
We already have the IIP number for the first two months of that quarter. Even assuming some strength in the December IIP number, I think the number we will get is about 4.9 percent. These are year on year numbers, it still shows some pickup in the sequential momentum. From a sequential momentum perspective, our view was growth bottomed in the second quarter of FY13. The year on year numbers will not pick that up.
For next year, we are projecting some modest acceleration to about 5.8 percent assuming that you have a normal monsoon, assuming there is some pickup in exports and assuming there is some pick up in investment because some of these supply constraints are released later in the year.
Q: We are going to see some element of consumption squeezed out as railway passenger fare prices, electricity prices, diesel prices, Liquefied Petroleum Gas (LPG) to some extent become more in line and therefore, take out some disposable income. I was speaking to a lot of bankers on restructuring norms that the RBI has put out, much higher provisioning to be done and that has already had an impact on the Net Interest Income (NII), the annual loan growth falling rather sharply for a whole host of public sector banks and now as you start keeping out a larger percentage of your profits as provisioning, they are definitely likely to lend out much less next year for fear of bad loans, for fear of restructuring as also for the stock of restructuring that has to be provided for. Are you expecting that they are going to have a more difficult FY12 than we have so far factored in?Chakrabarty: When we project next year's growth, we do it keeping in mind a particular growth rate for this year. We were working with something around 5.4 percent for this year and we were saying 6 percent for next year. If actually this year’s growth rate is closer to 5 percent, then the base changes and to that extent, meeting our target of even 6 percent growth would now become difficult under these circumstances if we can trust this data, to the extent that the last quarter’s activity numbers do not tell us a different story.
So effectively, the story that I am carrying out of this numbers is that the consumption slowdown has been sharper than probably I would have anticipated. There are still no signs of a significant revival in the capex side. Unless the capex side recovers, I do not see how consumption can come back into the system, especially when subsidies will be cut.
Q: Would you believe that the actual growth will be closer to 5percent than to 5.5 percent? Chakrabarty: As analysts, we have a tough job because we can't rely on the final estimate coming out two years later for our forecast. We will be judged on the basis of the next GDP print. I have no option but to revise my Q3 and Q4 numbers downwards based on this data.
_PAGEBREAK_
Q: What do you think the RBI is going to do with regards to these numbers? Do you think that they will possibly become a little more aggressive in terms of easing in 2013 after seeing these numbers?Chakrabarty: I have always maintained that a slow growth of 5 percent or around that for so many quarters is creating a condition for inflationary pressures declining. We have not seen a significant second round effect of the diesel price hike of September.
So purely from growth inflation dynamics, I would be more comfortable in thinking of more rate cuts. But, RBI has indicated that Current Account Deficit (CAD) will be another important factor in their decision making. I cannot see how CAD will come down significantly in the near-term. If that dominates RBI's decision making. Then we might not get so many rate cuts.
Q: So you are not expecting a cut in March?Chakrabarty: Yes, I am currently expecting a cut in March.
Chinoy: Well I am expecting a cut either in March or April. The inflation trajectory will still be supportive because you have very large base effects all the way to April. That number will most likely be well below 7 percent. Beyond April, it will be very hard because on March 31 we get a current account deficit number for the third quarter of the financial year and that number is going to be somewhere between 6.5 to 7 percent of GDP.
Q: We have seen a slowdown in consumption and services, which is estimated to grow at 6.6 percent in FY13. What do you think will be the impact on inflation eventually, not Wholesale Price Index (WPI), but Consumer Price Index (CPI)?Chinoy: Whenever you have cost-push inflation, you basically get core WPI moderating sooner than core CPI, because it is cost-push and not demand-pull. Because of that you have seen core WPI at 4 percent mark. Core CPI has been stuck in the 8 percent mark.
Whether I take the All India index or I take CPI industrial workers index, my sense is that if the slowdown continues that number will chip away. But 6 to 7 percent CPI inflation is still uncomfortably high because that is the number that people use to deflate any normal return, for e.g. on financial assets and that is what drives higher demand for gold. I would be a little careful about how quickly that comes down.
