Jun 05, 2012, 02.23 PM IST | Source: CNBC-TV18

Q4 GDP: Derailed economy has economists worried about FY13

Economists worry after India's economic growth grew at its weakest pace, slipping to 5.3% for the fourth quarter of FY12. The lowest growth in nearly nine years has them debating on what the factors are which led to this slowdown.

Samiran Chakrabarty

Regional Head of Research

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Moneycontrol Bureau

India's economic growth grew at its weakest pace, slipping to 5.3% for the fourth quarter of FY12. This is the lowest in nearly nine years due to poor performance of the manufacturing and farm sectors.

Samiran Chakrabarty, head-research, Standard Chartered Bank sees bond yields likely heading lower from current levels. The 10-year bond yields fell 3 basis points to 8.49% as concerns over global risk aversion lured investors towards safe-haven government debt.

India's economic landscape malaise is heavily intertwined due to the lack of positive global newsflow as well as clarity from Indian policy makers. Reeling under the blow of the twin deficits current account deficit and fiscal deficit, we also have headline inflation to deal with.

Manish Wadhwan of HSBC says if India is able to rein in its current account deficit, we could stabilise the fall in the rupee. This limits the flexibility of central bankers to ease liquidity, lower the cost of borrowing and make greenfield investments attractive.

The growth outlook for fiscal 2012-13 is now much lower, says Sonal Varma, India economist, Nomura Financial Advisory & Securities. "FY13 GDP expectations will have to be revised downwards," she says, adding that India needs sustainable non-inflationary growth but this current lag between growth and inflation could range from three to six quarters.

Rohini Malkani, the managing director and chief economist of Citi India expects the average inflation for FY13 at 7.4% but also sees the number heading higher in the second half of FY13. The India growth story has clearly been de-rated and the only way to get it back on track is for the government to place more emphasis on reforms, says Malkani.

According to Varma, the crisis in Europe has a huge role on how our economy fares. If the Euro crisis is resolved, she sees our FY13 GDP growth to hover around 7% but if the situation worsens then we may see our it at 6.5%.

Recent policy changes, tardy reforms and governance deficit have deeply dented investor confidence. The biggest bane for the market since last week has been the depreciating rupee. It reached another all-time low today at Rs 56.50 against the dollar in early trade on increased capital outflows and strong demand from importers for the greenback.

But Wadhwan says the rupee tumbling is in-line with other currencies from the Asian basket. He sees the INR depreciation as more to do with the situation in Europe. "The rupee depreciation is a global adjustment to the strengthening of the dollar," he says.

Malkani expects the rupee to trade in the 54-56 to the dollar range for the next 6-12 months.

Below is an edited transcript of their interview on CNBC-TV18. Watch the accompanying videos for more.

Q: This has come as a shocker. Were you expecting anything close to this 5.3% figure?

Varma: Not all, 5 was possible but not 5.3%. But the breakup suggests that the disappointment is mainly in services. Now it's possible that the slowdown is in the industry is in the private services side of retail trading, wholesale trading and the financial services side.

But the other factor could also be maybe they have seen some slowdown in the government component of services this quarter. Nevertheless services have been the strong part of India's growth rate. If that is also starting to collapse then there is a risk of India’s potential having already fallen below 7% now.

Q: Are you surprised with the GDP numbers; what could have led to this?

Malkani: While one was expecting that the growth in Q4 would be around 6%, it was primarily due to the fact that Q1 industrial production numbers were around 0.6%. This probably dragged these numbers down.

We do believe that it would be one of the factors that the RBI would have to keep in mind, not in its immediate policy but a few months down the road. This would have to be again taken into account with what's happening globally regarding oil prices, and all awarded goal posts that the RBI has been focusing on such as suppressed inflation, fiscal situation, food prices, etc.

Q: How do you expect the bond market and the foreign exchange market to react? We have already seen some sharp reactions with the yield cooling down quite substantially.

Wadhwan: It’s one of the ugliest numbers we could have expected. It’s a real shocker. It’s quite negative and it has surpassed all kinds of expectations on the negative what we have thought. The market has already reacted to this.

On a big picture basis, I would suggest that though there is still some kind of hawkishness left that interest rates may not come down, from the market side you can expect the reactions and they are factoring in these rate cuts to happen sooner than later.

They have already been on that side but even if RBI doesn't cut in June, the probability of a next 50 bps cut becomes very sharp in the July policy though I would not rule out some kind of a RBI action in June itself. It's far below the number what the policymakers would have expected to.

Q: You have been hearing all the details of these numbers, the worry is how much of a spillover happens for Q1 itself. How would you rework estimates or expectations now for Q1?

Chakraborty: The important thing to note here is that as we know in FY12, the investment engine was not working and it now seems that the consumption engine, which was supporting growth even that has started faltering. If you look at the breakup of numbers, the segment which we take as a proxy for consumption in the services sector, the retail wholesale trade has grown just about 7% from more than 10% which it was clocking before.

This sharp drop in the retail trade segment gives us an indication along with some anecdotal evidence that probably the consumption story is not as strong as it was in the first three quarters. We will have to now filter in terms of getting into our FY13 forecast. So we obviously will be reviewing our numbers after this but the big story seems to be that consumption is not safe anymore.

Q: Most of your peers have slashed FY13 expectations ahead of this number on an average to about a 6.5%-6.8% kind of take. Would you say everyone will probably have to rework these numbers with a downward bias?

Varma: Yes definitely, I think we are starting from a very weak position. Things have actually become worse in the April-June quarter with the global crisis. So there could be some spill over because of that in this quarter. And we are yet to see some policy response from Reserve Bank’s side, so there would be some downside risk.

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