See 5%-5.5% GDP growth in FY10: Barclays Capital

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Sailesh Jha, Director of Asian Economic Research, Barclays Capital, feels India will see a GDP growth of around 5.5% for FY10. "We see 6% GDP growth for FY11." He added that the GDP figure could actually be 7% this year followed by 7.5% next year.

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Here is a verbatim transcript of the exclusive interview with Sailesh Jha on CNBC-TV18. Also watch the accompanying video.

Q: One of your important forecast in the report that you have just released is that your GDP target for the current year at 5.5% could have an upside risk of 150 bps which means you see a 7% GDP this year?

A: Yes. Our base case right now is 5.5% for 2009-2010 and for 2010-2011 we are looking at 6%. We see that the risk is that we could actually be at 7% this year followed through 7.5% next year. We, essentially, think that growth has already bottomed in Q4 of calendar year 2008. We are looking for the GDP for final quarter of the last fiscal year to be out next week. We are looking at basically a big acceleration in the quarter-on-quarter season adjusted data for Q4 fiscal year 09-10. Second-third quarter of this calendar year would probably be looking at 8 to 8.5% on quarter-on-quarter seasonally standardized rates. Sounds like crazy numbers but I think both the top-down and bottoms-up indicators are already showing considerable signs of improvement. Do keep in mind that Barclays Capital is basically the most constructive on the outlook of the world relative to what peers which are either mutual or outright bearish. So we are very bullish on the world and the markets.

Q: Are you looking at the 7% GDP growth contingent upon something that the government will deliver in the Budget or irrespective of it?

A: It is irrespective of it because we have been the most aggressive on the street and on our fiscal deficit forecast. For 08-09, we had had been looking for long hand forecast of 12.9%. For 09-10, we are looking at 11.5%. Consolidate public sector deficit and that will give you basically a boost. Fiscal points of 100 to 200 basis points to growth. All of this loosening a fiscal monetary policy since second half of last calendar year will kick into the system in second half of 2009 onwards all the way to first half of 2010.

Q: Do you think with decisive mandate and with the no reliance ally on the Left some other regional parties the government can go ahead and free up the oil sector that is something you think is possible.

A: Anything in life is possible. The issue basically becomes will the government do it? It clearly has the mandate and essentially the number of seats that Congress got in this election is the highest in the last three elections, clear mandate. But there are other things to basically recognize - are there going to be any other political constraints that for example, the reform in the fuel subsidy area, time will tell. My sense is all this hoo-haa that we have been seeing from the markets--nice pick-up in equities, massive decline in dollar INR for last several days; a lot of it is predicated on speculation. I think in the next 6-12 days basically the government has actually to show three things. Not in the next 2 ½ years, next 6-12 months. One is on the Budget, which I think is essentially will come out by mid-July, that we see a sort of a modest upsize in the deficit for the Central Government to 6.5% to 5.5%. That is not a big surprise here because the issuance programme in our opinion of three trillion in fact is according to 6.5%, it is not 5.5%. If we see the level-off there and we see the consolidate public sector deficit at 11.5% this year then we are comfortable.

Two, the reforms in fuel subsidy. What exactly will happen especially we are thinking that Brent oil price will be tracking to USD 65 to 67 per barrel in the second half of the year.

Third, long held structural reforms in retail, finance and insurance will that happen in the next 6-12 months. My sense is that if we do not see those announcements in the next 6-12 months it is difficult to see that it will come 1-2 years later. It should come sooner rather than later because we will have the full momentum of the people behind them.   

Q: You forecast on INR of 45 by the end of this year and 44 going into 2010. What is your view on interest rates and on inflation? If this is the kind of growth you are forecasting coupled with the kind of money supply to globally and in India would you think that we are seeing the bottom of interest rates and you will actually start seeing them to spike-up the policy rates?

A: We are of the view unlike many, basically analysts that are now starting to think that we get hike in interest rates in the short term in the next two quarters. We are not of that view at all. We think as we have seen in the past business cycles that the first stage first of all on inflation--we are bottomed. We are already positive on month-to-month data on the WPI. We think that by fourth quarter we will be getting a pick up in inflation it could be quite significant but that is not going to induce, in our opinion essentially, hike in policy rates, the first stage of the movably first oration in late Q3 early Q4 that the central bank will be moving from loose to neutral is our view at his juncture. But that does not mean that immediately they will start making basically adjusting policy rates-up.

The first stage will be to managing liquidity conditions. Note that we are expecting significant acceleration capital flows not to the extent we saw in the boom market. But we will be seeing quite a bit of improvement in balance of payments, additions to liquidity then basically that impinges on the monetary phenomena related to inflation. And so it is quite natural for them to move from neutral to basically loose sort of oration-wise but we do not think hikes are in the cards in the second half of this calendar year, it is probably more a 2010 story.