See FY10 GDP at 5.8%: Goldman Sachs

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

Q: First if you could explain to us why you are lowering your current year gross domestic product (GDP) estimates to 6.7% and FY10 to 5.8%?

A: We think that the shock to the financial sector is going to transmit more and more to real activity. As you just said, we have already seen downward revisions in number of indicators whether it is industrial production (IP) or Purchasing Managers' Index (PMI) or auto sales. So, we are seeing a slowdown across the board and if you look at various industries, the exportable sectors facing a severe slowdown whether it is gems and jewellery, textiles, IT, construction is facing a slowdown as is autos. We see a slowdown across the board and this will continue in our view over the next year or so. So, that's how we think activity will continue to decelerate as we go forward. We are not seeing light at the end of the tunnel yet it is going to be a considerable period before we see activity trough and then a recovery happen. So that's why we are a little concerned about the growth dynamics and we think that growth will slow to 5.8% next year from here. 

Q: Some people took a bit of comfort from the Index of Industrial Production (IIP) number at 4.8% this time, but what is your sense of what kind of IIP numbers we will see October onwards for the next three-four months?

A: We are expecting some more deceleration in IIP and the signs are obvious, capex spending has come to a significant halt and there is a downturn as I said in nearly all sectors of the economy. So, we are looking at 4% average for the year as a whole on IIP and industrial growth and then declining further next year because of the knock-on effects of the financial sector and the financing problems that the sector is facing, so 4% for the rest of the year for IIP.

Q: At some point next year are you also factoring in a negative IIP number?

A: It's possible that we will see one or two spikes down which could even be negative. Remember we are coming off a period of very high growth the economy has grown on average at over 9% for the last three years and we are seeing a cyclical downturn. Now in previous cyclical downturns, there has been contraction in activity in terms of industrial activity, so this is not something that is unheard of. We are seeing that globally whether it is the US, whether it is Europe, Japan even the China IP numbers came out very weak, so it is possible that we may see a negative spike in IP next year. But I don't think that this is a trend that will continue; I don't think that we will be in a negative territory for months at an end on IP there is still some demand in India which will keep it in a positive territory.

Q: Interesting point you have made in your report, which is that you see a little room for fiscal action or fiscal stimulus going into FY10. How much more do you think the monetary side can do or what kind of rates are you working with? Do you think the eyes are going to shift now to the reverse repo as many expect?

A: Yes, if I look at the balance sheets of the main actors in the economy, corporates, households, banks and government, the corporate balance sheets are shrinking and they will be under severe pressure because of not only the fact that their net worth has fallen so significantly but also the financing pressures that they face and also the fact that they have significant investments in the stock market and real estate. The households are also relatively stretched, the banks, which are the eye of the problem, the financial, market turmoil; I don't expect them to be an engine of growth.

So, finally you are left with the government and in many countries there is a lot more space to spend out of this and China demonstrated that about a week or so ago but India doesn't because we have increased our spending quite considerably over the past years and this is not going into investments per se but more on consumption. So that leads us to a very little room to spend out of trouble, even if the commodity prices come off; oil and fertiliser prices, I still don't think that we have room to expand ourselves out of this downturn.

The burden will fall on monetary policy and we have already seen the Reserve Bank of India (RBI) cut rates quite significantly, I am expecting them to cut more in fact we are expecting rates to be cut about 200-250 bps on the repo and also significant action on the reverse repo because in a downturn it is monetary policy now that has to take the brunt of the stimulus.

Q: I heard you say that it will take a while for the economy to trough out and then the process of recovery to start. There are some who have an optimistic view that this quarter and next quarter is bad and after that we trough out and then we start moving up again. Do you think it will take longer for the trough to come about if at all next year?

A: Yes, I think so. I think that with the global economy going into a recession next year, India cannot operate in isolation and we are seeing the knock-on effects of the exportable sector now spilling through the Directorate General of Commercial Intelligence and Statistics (DGCIS) said that exports will decline 15% in October. I am not seeing a significant improvement in that environment and if you look at as I said, the stretched nature of the corporate balance sheets and household balance sheets, I do not find where the stimulus to the economy is going to come from in the near-term. So, I see this more towards the end of 2009 before we start seeing a pick up in activity. It will be highly dependent on what happens in the global environment, I think that the era where India could function on its own is over we are more globalised now then we think and even the commodity prices will help, the monetary stimulus will help. The other factors that are reducing growth are dominant at this stage and so I see a slightly greater pause in activity than what you mentioned, so towards the end of 2009.