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Citing that India’s potential growth has lowered considerably from its highs of 2003 to 2008, Jahangir Aziz of JPMorgan tells CNBC-TV18 that the decline in equipment investing by corporates is the key trigger for this slowdown.
“In the second half of 2008, overall equipment investment by India was somewhere around 18-19% of GDP. Now, it is down to about 14.5-15% of GDP,” quotes Aziz.
After reading about India’s unexpected gross domestic product (GDP) for the fourth quarter coming in lower at 5.3% and for fiscal 2012 clocking 6.3%, JPMorgan has revised its FY13 GDP number for India as well. They have brought it down considerably to about 6%.
“One was the fact that India’s potential growth has slowed down probably around 6-6.5% and the other reason in our view is that in the second half of the year, a European recession will likely be much deeper, US growth is likely to falter and consequently what we are going to see is the global economy slowing down appreciably in the second half of the year,” he explains.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: What are your comments on the 5.3% Q4 GDP number and the 6.5% for the entire FY12? Has the economy slid rather permanently or at least for a sustainable period from that 7-8% pace? Also, what has caused this slowdown?
A: For quite sometime we have been arguing that the potential growth in India is much lower than what it used to be between 2003 and 2008 and that has been one of the reasons why we have been arguing that this inflation problem isn’t going away because even if the economy is slowing, potential growth has slowed much more. Part of the reason as to why potential growth has slowed is that there has been a massive decline in corporate equipment investment.
So the things that drive productivity growth in India, the things that drove productivity growth in 2003 - 2008, the big engine was that firms, manufacturers and services were really bringing in new technology etc through huge investments in equipment. That stopped from the second half of 2008. It isn’t really a 2010-11 problem; it started quite sometime back and has never recovered. Just to give you a number, in the second half of 2008, overall equipment investment by India was somewhere around 18-19% of GDP. Now, it is down to about 14.5-15% of GDP.
Q: What is your sustainable growth pace for India? What is your FY13 forecast itself?
A: For FY13, we have brought it down considerably to about 6%. Now the reason why we brought it down was two factors - one was the fact that India’s potential growth has slowed down probably around 6-6.5% not in the 7.5-8% that people still normally think about India.
The other reason which probably has to do with the last round of cuts that we made, so this was much more driven by our view that in the second half of the year, a European recession will likely be much deeper than what we are expecting, US growth is also likely to falter and consequently what we are going to see is the global economy slowing down appreciably in the second half of the year.
We were getting tired of making the same argument that growth is 6.5-7% in India but with a lot of downside risk. So we decided to bring it down to a point where we now think that the risks are probably balanced on both sides.
Q: If your expectation is that growth will only be at around 6-6.5%, are you necessarily not expecting a cut from the RBI?
A: If 5.3% happened in isolation of everything else that is going around then moving from being at 7.5-8% not too long ago, to 5.3% would almost automatically say that you need to cut rates. The problem is that this is not happening in isolation. It is happening with a lot of other things that is happening around it, including the fact that the rupee has depreciated massively over this entire period of time.
We started August of 2011 with the rupee around 44-45 and we are now at 55-56. This massive depreciation of the rupee in our view has already loosened monetary conditions significantly. The way we measure it is by saying that even if I take the extreme view that the impact on the economy often in exchange rate depreciation is one-tenth of that of interest rate, this massive depreciation is equivalent to almost 100-150 bps of rate cuts already in the system. So it is not happening in isolation.
Given that this has already happened and given the fact that the rupee weakness doesn’t look like it is going away anytime soon, we would be very careful saying that it is appropriate for the Reserve Bank of India (RBI) to cut rates. That doesn’t mean that the RBI won’t cut rates, we are just saying that it is not appropriate to do so.
Q: In your mind when exactly would you want the RBI to cut rates?
A: You really need to see what happens to inflation once the base effects have gone away. We have been seeing this massive gap down in inflation since December to March simply on base effects. There has been some decline in core inflation and in the momentum of core inflation. We have been saying for long that - once the base effect goes away, inflation is back up.
Inflation did go back up in April. We will actually like to see what happens in May and June because our fear is that by June, this inflation number is going to reach around 8-9% even without the help of a bad weather. So even if I take normal weather, it is going to reach there. The important thing is to figure out what is going to happen to core inflation.
Our sense is that May was a pretty bad month for the rupee and therefore a lot of imported inflation must have gone into the wholesale price index (WPI). We need to wait and see how much of that has happened in the June 14 inflation numbers. But at least let us go through this reversal that is taking place in inflation and see where it is going before we do anything in terms of interest rate decisions.
Q: In your inflation, growth and other forecasts, what are you assuming by way of fiscal moves? Are you penciling any price hike at all in diesel?
A: We are assuming that at least they will move halfway to make sure that the fuel subsidy doesn’t go significantly beyond what they have on the Budget right now. So what we have in the Budget right now is about Rs 43,000 crore as fuel subsidies. In order for us to keep it to that level, you still require at least a 10% hike in diesel prices.
We are hoping that in the second half of the year, after the Presidential elections and everything else dies out, there will at least move halfway towards doing that. We in fact have two diesel price hikes of 5% increase in the second half of this calendar year and one more in the first quarter of next year.
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