HSBC Holdings sees GDP growth averaging at 8.5% in FY11

India's GDP growth has come in way above estimates. GDP has grown at 7.9% from 6.1% quarter-on-quarter and 7.7% year-on-year. For the first half of the year, GDP growth stood at 7% as against 7.8% YoY. Manufacturing and services sector jumped more than 9%. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, says the 6.5% full-year target is likely to be upped.

In an interview with CNBC-TV18, Robert Prior-Wandesforde, Senior Asian Economist, HSBC Holdings Plc gave his perspective on the GDP numbers and his outlook.

Here is a verbatim transcript of the exclusive interview with Robert Prior-Wandesforde on CNBC-TV18. Also watch the accompanying video.

Q: What are your first reactions to the numbers – the positives and the downsides?

A: As upside surprises goes, this is certainly a big one; 7.9% was well above expectations of 6.3%. My own calculations, working out what the quarter on quarter increase, what the sequential rise was, in seasonally adjusted terms looks like over 3% something close to 14% on an annualised basis, which is India’s biggest ever quarter on quarter rise since the quarterly numbers began in 1996. So this is a huge number.

If we strip out agriculture, then year-on-year GDP growth was up something like 9%, again the strongest for at least the best part of 12 months. The economy is back; it is being inflated by all the government stimulus, it is being inflated perhaps by the first effects of the interest rate cuts as well.

But there are other causes as well, private consumption is a number worth looking at. That showed a strong impulse as well, the strongest for some time at nearly 6% growth.

So the economy is on the rebound, it is coming back. There are worries in terms of the drought. But I think we are looking at probably further upside surprises in the year and 18 months ahead.

Q: What is the trajectory going forward because as equity financing does continue that’s supported the growth this quarter and you have a lot of banks coming and telling us that the second half is going to be pretty strong in terms of credit growth. That was a bit of a lacunae in the entire first half. What sort of trajectory do you see now that all guns and cylinders are firing?

A: I think it is all guns apart from agriculture. We should expect to see quite a big fall in agriculture output. We know initial estimates of the drought suggests that crop output is down something like 15-20% for some produce anyway. And that will be reflected in much weaker agricultural numbers as we go forward. So that will be a negative.

At the same time, in terms of industrial production we are looking at a levelling out now in terms of industrial growth at around 8-10% is our guess. So in the short-term the momentum is going to come from services. I think the service sector growth which was strong this quarter certainly ex-government anyway, that will pick up further.

The government bit must presumably slowdown. So my guess is that GDP growth will hold around these kind of levels perhaps a bit lower in the next couple of quarters as the agricultural effect comes through. But then take another upward leg in the following financial year 2010-11 when I am looking for GDP growth to average 8.5%. That’s based partly on the assumption that agriculture has always - in the past atleast - bounced back strongly the year after a drought.

Q: Where does all this leave the Reserve Bank of India? Its theory of fragile growth on which it predicated a 'no action' policy on October 27 perhaps is now no longer there. How quickly are you expecting action and what might be that action?

A: This number significantly increases the chances of a policy rate move, even an increase in the reverse repo rate before the end of this calendar year, before the end of next month.

I am sticking with January. I think there is much point changing it other than to highlight the risks. I am sticking with January as the first increase in the CRR rate, and March for the first increase in the policy rate. But as I said, clearly the risks given this number is that it happens sooner rather than later.

The government could impact as well; the government is going to sit up and take notice of this number. The governments have been talking about exiting some of these fiscal stimulus plans at the start of the next fiscal year, in April.

Again, they may think about this doing rather earlier or perhaps when they do start do it rather more aggressively as they head towards the exit. But this mean the exit is closer.

Q: Aside from all these, what’s your forecast of the trajectory of inflation itself. Looking at the kind of liquidity driven commodity price rise or at least sustained prices at higher levels that you are seeing including the manner in which food inflation has gone up and plus of course now that we know that consumption is more robust than many people anticipated. Do you think inflation is going to look much worse than what the economist have forecast so far which is around 6.5% to 7% in Q4 of the fiscal?

A: Since June we've had a forecast of wholesale price inflation rising to 8% and again we are happy to stick with that. That’s on the basis that commodity prices flatten out at around current levels. Of course if they rise further then we could be seeing upside risks to that.

Consumer price inflation, I actually think may be close to a peak but I guess we have been saying that for a few months now. It is obviously heavily driven by food price inflation particularly international food price inflation, as India is now importing more from abroad. They cannot rely so much on their own produce given the drought.

International food price inflation could be topping out, or should be topping out fairly soon. And that may well feed through to lower consumer price inflation in the next couple of months.

So, what we may see is a slightly contradictory pattern with wholesale price inflation picking up towards 8% but consumer price inflation starting to move down in the next couple of months.