May 25, 2012, 06.29 PM IST
Analysts have cut India’s FY13 GDP forecast on concerns of a tough economy riding on weak market, sliding rupee and widening of fiscal deficit. Jahangir Aziz of JPMorgan explains that the India’s monetary and fiscal policies are extremely loose.
In an interview to CNBC-TV18, he said, "The reason why India has high inflation is because growth is running far ahead of India’s capacity. This is largely because monetary policy and fiscal policy both are extremely loose." He also warns that analysts will be forced to lower growth rates, if euro crisis worsens.
Recently, Goldman Sachs too cut its FY13 gross domestic product forecast to 6.6% from 7.2%, citing a weaker investment outlook due to domestic policy uncertainties.
However, the big concern is about the second half of FY13 as inflation is likely to start spiking in April itself at the end of the base effect. "Inflation rate could go to 9% by July," Aziz adds. Rupee may even sink to 57-58 per dollar in the absence of a policy change, he points out.
Batting on diesel price hike and strong policy reforms, Aziz stresses that there are lot of politically insensitive measure that the RBI and government can implement but not willing to.
"If we get a 10% increase in diesel prices, I think you might see quite a bit of support coming, atleast in the short run to the rupee. That will actually convince people that the government is willing to bite the bullet and take the tough measures," he elaborates
Below is the edited transcript of his interview with CNBC-TV18's Sonia Shenoy and Ekta Batra. Also watch the accompanying videos.
Q: Goldman Sachs lowered its GDP growth target to 6.6%. What are your thoughts on this? Would you be scaling down GDP targets for the year or would you wait for Q1 GDP numbers that come out next week to make that assessment?
A: I am going to wait for next week’s GDP numbers for Q1 to come out. Our sense is that however bad the situation looks, Q1 of this year will actually be better than Q4 of last year.
There is some momentum going through. We have seen new export orders and the PMI shoot up. If I do scale down GDP, it won’t be by much. I might just go below 7%. We are just above 7% now.
I think the bigger concern is what happens in the second half of the year, how Europe pans out. If European growth is brought down much more then the support one expects from exports won’t be forthcoming to the same degree, and then we would be forced to reduce the growth rate a lot more.
But we need to get over this next one-two months hump that we are witnessing and get to a point where the rupee stabilises and we get some sense of which direction policies are going to go to. That will be key.
There are a lot of things that is being held back because of political sensitivity. But there are a whole lot of things that the government can do that is politically insensitive, which the government or the RBI is still not willing to do.
Q: What does that really do to inflation? A lot of people have now scaled up their inflation targets as well. We are expecting to hear about some sort of diesel price hike anytime soon. How much pressure this will put on inflation? Do you think the next number will look uglier before the June policy comes out?
A: We have had extreme view on inflation, since March of 2010. Our view hasn’t changed. Our view has always been that the reason why India has high inflation is because growth is running far ahead of India’s capacity. This is largely because monetary policy and fiscal policy both are extremely loose.
We expected inflation to start spiking in April itself at the end of the base effect. That’s exactly what the inflation has started to do. We have two diesel price hikes for the rest of the year, amounting to about 10%. That could happen either in two parts or it could happen in one part, if the government is brave. But based on that, we already had an inflation rate going to about 9% by July. We are still sticking to that trajectory.
We think that the 7.2% April print will likely be revised up to 7.5-7.6% after the usual revisions are done. The inflation is on track to reach about 9% by July. So, we are really not changing our inflation view. We are sticking to 9% peak of inflation, somewhere around July.
Q: The other thing, which has been spoken about, is the subsidy burden and what exactly might happen to the fiscal deficit situation. Hypothetically, say we do get a diesel price hike anywhere to the tune of around Rs 3-4 per liter. What do you think is the relief that we could see on the subsidy burden then?
A: The Budget has about Rs 43,600 crore as the amount of subsidy. If you assume that oil averages about USD 100 a barrel, not even USD 120 a barrel, for the rest of the year and the rupee averages around let’s say 54-55 for the rest of the year, the amount of diesel price increase that is required in order to just keep to the subsidy of Rs 43,000 crore is about 10%. So, at the minimum, you require 10% increase in diesel prices just to keep to the subsidy. In order for the government to reduce the subsidy, it means more than that.
If we get a 10% increase in diesel prices, I think you might see quite a bit of support coming, atleast in the short run to the rupee. That will actually convince people that the government is willing to bite the bullet and take the tough measures.
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