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Sep 13, 2013, 12.54 PM IST | Source: CNBC-TV18

Weak domestic demand a worry; CPI to be around 9-10%: HSBC

Despite a surprising IIP jumping to 2.6 percent, Leif Eskesen is not very hopeful of a revival in the economy. He feels that low domestic demand is a cause of worry for India.

Leif Eskesen

Chief Economist, HSBC Group

More about the Expert...

The better-than-expected IIP numbers on Thursday raised hopes of a revival in the economy. Economists, though, do not see it as a genuine troughing out of the economy.

Leif Eskesen, chief economist- India and ASEAN at HSBC feels that domestic demand continues to remain slow which is overshadowing better exports. Indicators such as PMI data for manufacturing and services in July-September have been tailing off, he told CNBC-TV18.

He expects the CPI to continue to remain at the elevated levels of 9-10 percent, while food inflation may see some respite in the long-term on the back of good monsoons.

Also read: Weak jobs data may lead to a delay in tapering plan: IHF

Below is the edited transcript of his interview to CNBC-TV18.

Q: What did you make of this 2.6 percent growth? Will you pooh-pooh it because some of the internals are unbelievable? Or is it a genuine troughing out of the economy?

A: I will probably pooh-pooh it a little bit. If you look at what drove it, good manufacturing was one aspect. When it comes to utilities; in electricity output, part of it in the end was a base effect.

In the manufacturing space, a lot of it was driven by a rebound in capital goods segment. We all know that it is very volatile. So, it is very hard to extrapolate a trend unless we have seen a few more data points. It is a bit too early. If you look at other high frequency indicators; far for the July-September quarter the PMI readings for both the manufacturing and services sector have been tailing off.

This suggests that demand conditions in India are quite weak still and are actually weakening. So, think there would probably be a little bit of a payback in coming months. Overall, the growth outlook for the manufacturing sector with the sort of slowdown in domestic demand is still relatively subdued.

Q: Would economists be upping their numbers going by the possible impact of rupee depreciation? JSW Steel said that their crude steel production in August is up 29 percent year on year. Their flat steel production is up 60 percent. They are going to restart an old plant. Do you think import substitution, greater exports is an argument that can push up growth estimates?

A: The trade numbers suggest that there may be early signs of the weakening of the rupee having some impact in terms of supporting external demand to some degree. Ro some extent, it can provide support for the more export oriented portion of the manufacturing segment.

At the same time you also have the domestic demand slowing down. So, that is going to pull in the other direction in terms of dampening demand for consumer goods. It is going to also keep demand for capital goods relatively low.

So, I wouldn’t suspect in a sense that necessarily the benefit from the weaker currency will outweigh the weakness when it comes to domestic demand.

Q: What did you make of this CPI numbers? Although there was a bit of slippage, it is still relatively quite high at around 10 percent. What is your estimate going ahead?

A: It would still continue around these high elevated levels in the sort of 9-10 percent range. You still have a weaker currency, high imports, which are its broader drivers. It is still a story of pass through of administrative prices. When it comes to food inflation we could, may be a little bit deeper into the years, see some effects from the favourable monsoons, but may be not in the very near term.

There still is a broad reflection in the number that has to do with the more structural issues that India faces in terms of supply demand imbalances. So, it is going to remain quite elevated in the next couple of months and we are not going to see much of a down trend.

Over time as we go a bit deep into the fiscal year, I would suspect though that some of the weakening that is now taking place in domestic demand could being to sort of gradually temper inflation readings there but it would be a very slow process.

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