PMEAC's FY13 GDP figure over optimistic? Experts believe so

The PMEAC report released today paints a rosy picture of the economy, but experts tell CNBC-TV18 that this may not actually be the case. Sajjid Chinoy of JPMorgan says that PMEAC's growth estimate of 7.5% for FY13 is realistic, but does not agree with the inflation internals and deficit estimates. "I am not convinced that inflation is going to be between 5-6% in an environment where global crude prices have risen," he said, adding that a current account deficit of around 3% is also overly optimistic.

Samiran Chakrabarty of Standard Chartered Bank also agrees, saying that "what comes out quite clearly is what we want to achieve rather what we will achieve." According to him, the investment to GDP ratio will need to go above 30% to achieve this rate.

To meet this target, Chinoy says that supply constraints will have to be released, especially in areas like land and mining. "The second constraint is fiscal consolidation; while it is needed, it will also drag growth," he said

Below is an edited transcript of the interview. Also watch the accompanying video.

Q: Close to 8% is what the Economic Advisory Council is saying. Is this going to be as optimistic as FY11?

Chakrabarty: If you look at all the forecast from growth inflation to current account deficit to balance of payments, what comes out quite clearly is that this is more like what we want to achieve rather what we will achieve. So in that sense it is making a statement.

What really strikes me is that is the last statement admitting that 8% is the maximum that we can grow unless world economy gives us a lift. This is definitely a very different stance from what the planning commission has been putting up for the next Five Year Plan. So whether that number also will get revised on the basis of this new assessment of the realities is something which will be interesting to see.

Q: Your first thoughts?

Chinoy: I think the headline numbers are okay. I think the PMEAC said that growth this year will be about 7.5%. But I am not sure I agree with some of the internals. I am not convinced that inflation is going to be between 5% and 6% in an environment where global crude prices have risen and the fact that the PMEAC itself talks about diesel prices having to be, their domestic prices being increased. So in that environment to get 5-6% inflation handle will be very tough.

Similarly I think their estimate on the current account deficit coming down to around 3% seems a trifle optimistic. Remember, this will be a year when growth will accelerate, where inflation may still stay higher so the projected reduction in gold imports may not materialize. So I do agree that 7.5% is a realistic assessment on the economy, but I am not sure that some of the other projections are consistent in terms of current account and the inflation number with that growth projection. But overall I have no quibbles otherwise.

Q: If 7.5-8% in terms of GDP growth for FY13 is plausible at this point in time, what do you think are the current steps that we need to initiate in order to achieve it?

Chinoy: Well some of the steps were laid out very clearly by Dr. Rangarajan. The first is that I think some of the policy constraints, the supply constraints like land, mining will have to be released pretty soon otherwise a 6% growth in mining will not occur.

I think the second constraint is fiscal consolidation. Remember fiscal consolidation will be negative in terms of activity because fiscal multipliers are positive. So when you consolidate the fisc, that will be a drag on growth. But the whole idea is that credible fiscal consolidation will crowd in private investment and that will more than offset the impact of the fiscal consolidation.