India's in a sweet spot now, says Credit Suisse

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Yesterday, there were some disappointments with sub-7% guidance for full-year India GDP that the CSO set out. Robert Prior-Wandesforde, head of India & South East Asia economics at Credit Suisse spoke to CNBC-TV18 about how he reads the number and what the scene is, going ahead. 

"The right way to read the numbers is that I think the big downside surprise on growth relative to consensus is now behind us," he says. However, he warns of the consensus being too bearish. "Nonetheless, most of the bad news should be in the price as far the economy is concerned," he says. 

Prior-Wandesforde sees a continuous downtrend in inflation, but the RBI is still going to cut rates by 100 bps this year, he says. He sees agricultural growth estimates being stronger and says that the industrial sector has now bottomed out.  

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

Q: What is it that you expect to see in terms of growth targets; is the CSO getting it right with 6.9% or do you think it could be worse or conversely better?

A: We had 7% for the current fiscal year improving slightly to 7.3%. As you said it was lower than consensus, but fractionally so. I think the big downside surprise on growth relative to consensus is now behind us. We have been below consensus for a longer-time and we are now no longer below consensus, and in fact, I think it's a danger that the consensus gets too bearish. That clearly has important market implications, hopefully means that not all of the bad growth news in the quarter will see some sort of fantastic V-shape recovery in the near future. But most of all the bad news should be in the price at least as far as economy is concerned.

Q: Where do you see any kind of prospective revisions on the way up, do you think its the agricultural numbers which might be revised higher and over the next couple of quarters, if your view is that growth will improve or accelerate next year marginally, in which parts do you expect to see that acceleration?

A: Certainly in terms of breakdown that we saw yesterday, it was the agriculture sector that surprised me. We thought growth will be more like 3.5-4% in all, but they came out with 2.5% and it seems to me that the weakness that we are seeing in food prices and in many food stocks suggests that the harvest has been pretty good and therefore agriculture output has been pretty good. That in turn has an implications for the spending components of GDP, given that food prices are falling, given how dependent so many people in India are on food, it's such a huge part of a typical consumer's basket. Those falling prices imply significant real income gains and that should bode well for consumer spending.

So I suspect as we go through 2012, we might start to see again some better consumption numbers at least on the expenditure side. I suspect that the industrial sector has now bottomed and we will start to see improvements. It's certainly clear that the global trade cycle is improving. I would also note that we look at export order components of India's manufacturing PMI-  that's risen by more than 12 point over the last four-five months and that's not a bad lead indicator of exports and hence industrial production.

Q: What about inflation because part of the premise that growth will recover next year is also predicated on interest rates coming down at least for most people. But it seems like a global reflation trade is on with so much liquidity being printed, it's fueling up most asset prices. Do you think the RBI might sit back in a couple of months and say inflation probably is creeping back and I need to hold my horses?

A: No, I don't think so. If we look at what happened so far, the rupee denominated commodity prices, then we have already seen that fall from year-on-year rate of 40% down to less than 20% and it look so much certain to fall close to zero in the next couple of months. That is largely because of base effects, obviously commodity prices rising more strongly this time last year than they are right now. The other point to make here is that commodity price inflation does typically lead also price inflation. Now of course, if this reflation trade continues and does start to turn commodities in a more significant fashion, then certainly possible we could be looking at a pickup in WPI inflation later in 2012, but I don't think that's given. I think there are some growing question marks for e.g. about whether the Fed will indeed deliver QE3, for example. So my suspicion is that inflation is going to continue to come down; the January number will fall below 6% in calendar Q2, and hopefully, remain around those levels. A combination of that combined with another 6-9 months of sub-7% GDP growth will see the RBI deliver a meaningful rate cut, perhaps in the order of 150-200 bps.

Q: Would any of that be premised on what comes through on the fiscal deficit picture for the next year because that is what some people point out and what is it that you expect to hereon on what the fiscal deficit figure may look like?

A: What the government does is of some importance. I don't think it's of overwhelming importance and I think maybe some are getting too worried about the public finances right now. Clearly, ahead of the budget, the RBI wants to put a lot of pressure on the government to do as much as they can, but at the end of the day what matters to the RBI is what is happening to inflation, the future trajectory inflation, what is happening to growth. I suspect what we will see in the budget is at least the appearance of fiscal tightening, we will see forecast of a much better budget deficit in 2012-13 in the current fiscal year, but I suspect as usual, a lot of that will be somewhat of a mirage and it will be based on growth expectations that once again are too high, will be based on potentially overoptimistic expectations about divestment proceeds and the potential for 2G license revenues to be higher than previously were and so forth. So it's going to at least professionally look better or look tighter than is likely to be the reality of the situation.

Q: What would you identify as the key macro risk going for India right now or would you say we are slowly entering a goldilocks patch where inflation remains subdued, rate cuts do happen and fiscal policies muddles along?

A: I certainly think right now India is in a sweet spot. At the end of the last year the sweet spot may well to live equity market gains of about 30% during the course of 2012 and of course we have had about half of that already in just over one month. Yes, it's exactly right; it's the combination of falling inflation to at least reasonably low levels, growth bottoming out. I think the growth bottom on year on year term will be in Q1 although as I said we will see a speedy recovery and meaningful rate reductions, none of that means that India is cured its structural problems, its twin deficits and so on. But it is as I said a bit of a sweet spot that I think India is in right now, it is almost a reversal of what we saw through 2011 when the equity markets were so poor.