Part of the reason why the market witnessed volatility yesterday could be because of the weak GDP numbers which came in. Richard Jerram, chief economist of Bank of Singapore tells CNBC-TV18 that India's GDP growth is close to bottoming out.
Part of the reason why the market witnessed volatility yesterday could be because of the weak GDP numbers which came in. Richard Jerram, chief economist of Bank of Singapore tells CNBC-TV18 that India’s GDP growth is close to bottoming out. Questions are now arising over whether a 6% GDP growth rate is the new normal for India. For the fourth quarter, he is expecting a GDP number above 6.5%
In exactly 15 days, many investors and market analysts are hoping the RBI will cut interest rates at its credit policy meeting. Jerram also belongs to the group awaiting a 25 basis points rate cut.
India is seeking an additional 3-4 million tonne of crude oil from Iraq while maintaining that it will not cut imports from Iran under US pressure. However he says rising crude prices are putting India in a tight corner.
With expectations rife over the Finance Minister addressing the burgeoning current account deficit at the Union Budget 2012, Jerram says our fiscal deficit isn’t at such grave levels as compared to its developed peers, namely Europe.
Below is an edited transcript of his interview with CNBC-TV18. Watch the accompanying video for more.
Q: How did you read the Indian GDP numbers for the third quarter? Do you think that was the trough and things will only improve from hereon?
A: Yes, I thought the figures in someway were exactly what you wanted to see. What you want to see is the evidence that the monetary tightening of the past two years is working and you saw that in terms of the weakness in the manufacturing side and the weakness in the capital spending side. You would expect that if the cost of borrowing goes up and the area of the economy that has the most is going to be investment that certainly seems to have been the case. So I think that’s good news and probably it does signal that you are getting fairly close to the bottom of the cycle.
Q: The silver lining over here seems to be on how much this will encourage the RBI to move and how soon. On that account what are you expecting to see? Do you think they will move as soon as the next policy and by how much?
A: Inflation has come down a little bit more quickly than we had expected. With that in mind and with the relatively weak growth they probably will cut 25 bps at the mid March meeting. There are some worries about oil prices and what that might do to inflation but if you focus on the underlying trends then you can see that the policy tightening has been effective. The underlying inflationary rate has slowed down and that does give them the room to begin to ease policy a little bit earlier than it seemed likely a few months back.
Q: What are your expectations for the Q4 GDP? What are you penciling in for FY13?
A: We think you will get a little bit of a bounce for the next quarter maybe 6.5-7% type of number and in general the growth rate is going to struggle to get much above 7-7.5% over the coming 12 months. You should see gradual acceleration in response to what will be a sequence of rate cuts from the RBI. There is a timeline involved. You are not going to see things flip around immediately as they start to ease but gradually through the year you would see the momentum buildup.
Q: What is your reading of how badly Indian macros are getting affected by the price of crude because that has come into play once again with the recent spike?
A: Crude is a problem for the whole region. Some countries subsidised fuel more aggressively than others. In some cases you have seen an inflation impact and in some you have seen a budgetary impact. India in some ways is a bit worst placed than many other economies because India running a current account deficit, the rising price of crude increases the scale of the deficit and does to some degree raise concerns about the balance of payment situation, about the exchange rate if oil does keep on going up. In that sense, India is little different from many of the South East Asian economies that we look at.
Q: How carefully would you watch the fiscal deficit figure announced in the Union Budget and how much weight would you attach to it? Last year’s figure is very different from what was announced or indicated in the Union Budget?
A: The expectations are that the deficit announcement is going to be 5-5.5% of GDP but if your growth forecast is wrong then the deficit is going to come in larger than that. You have a fairly good nominal growth in India. You haven’t seen the underlying debt levels increasing. So for a rapidly growing economy running a deficit of 5% looks a little bit dangerous but you don’t make parallels for example with Europe where the 5% deficit is in a very slow growing economy, is a big problem if you are a European economy.
India is still a dynamic rapidly growing economy so if you look at the debt to GDP ratio and the GDP number is increasing quite rapidly. That means that you can keep the debt under control even running a deficit of 5-6% of GDP. So yes, we worry about it but I don’t think it’s a signal that’s flashing red as something which needs to be tackled urgently.
READ MORE ON Indias GDP growth, credit policy, crude oil, Richard Jerram, Bank of Singapore, Union Budget, fiscal deficit
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