Revival post rate cut to take at least a yr: Credit Suisse

Even though the stock market may seem buoyant, Robert Prior-Wandesforde of Credit Suisse says one cannot expect any meaningful pick-up in the economy till rates are cut. And even after that, he says, the economy will take at least a year to revive its growth rate.  

The Centre's fiscal deficit had ballooned to 5.76% of GDP in the last fiscal due to high fuel subsidy outgo. The government has not been able to decontrol diesel prices even after taking in-principle decision. The government has budgeted 5.1% of fiscal deficit for 2012-13. Prior-Wandesforde sees fiscal deifict at 5.8% of the GDP in FY13. "We do not see structural reforms that could lower fiscal deficit," he told CNBC-TV18 in an interview adding, the government seems incapable of delivering any reforms. Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: What is your Q1FY13 GDP estimate? What is your estimate with regards to FY13 as a whole? Would it be with an upside risk or a downside risk? A: First of all, in terms of Q1 GDP number, we are looking at 5.8%. For the fiscal year, we have a fairly optimistic assumption, 6-6.5%. However, we will need to look at that in the context of what is happening to the monsoon or rather the lack of monsoon. I can’t see any obvious fundamental drivers for an improvement in underlying activity, atleast not until we see a meaningful reduction in interest rates. Even then, we will have to wait for a year or so to see the positive effects of that. However, at the same time, I fail to fully understand the extent of the weakness in the January to March quarter, the 5.3% number. I can’t find anything that fits with that number. In that sense, I wouldn’t be surprised, if that was a bit of a statistical quirk and we saw a slightly better number in one of the next two quarters. But, importantly, there is no real fundamental driver for a meaningful pick up in activity. Q: If we are indeed working with a drought, are you factoring in a 0% for agriculture for FY13? Is that factored-in in your 6% plus forecast at the moment? As and when you factor in, what will you put-in in terms of GDP forecast from agriculture? A: Something probably pretty close to flat. It’s tricky because looking back at the experience of other floods, there is no particularly clear linear relationship between how bad the monsoon is and what the impact is on agricultural output. For example, in 2009, when we saw the third worst drought in India since 1,901, agricultural output was roughly flat, whereas previous episodes of drought, which apparently weren’t as bad, have seen agriculture falling more. The hope is that the government is perhaps more able now to offset some of the worst effects of the drought on agricultural output and perhaps limit the spill over effects from a weak drought to the rest of the economy as well. It’s obviously remains to be seen whether that can be delivered. _PAGEBREAK_ Q: What are you working with in terms of a fiscal deficit in that case, since the government will have to do so much? It’s not moved even where it should in certain outlandish subsidies. Is it 6%? What are you working with for the year? A: We have 5.8% at the moment. But I would be surprised, if it was 6%. The important thing is we think it will be overshot. The 5.1% number will be significantly overshot. One suspects the governments will be making a fairly substantial revision to their own numbers, when they come to the half year fiscal review that they will do. It’s crystal clear that the economy is weaker than was expected. Subsidy bill is higher than was expected. We are not seeing structural reforms that would repair that kind of cyclical damage. Q: We get inflation numbers tomorrow as well for July. What are you penciling in? How exactly would you extrapolate it for the entire fiscal? What is the average rate that we could possibly be working with? A: For July, we are looking at something like 7.4-7.5%, a fairly boring number really rather around consensus consistent with a further small move up in food price inflation, but with the core rate remaining stable at just below 5%. As a whole even building in a rise in food price inflation to something like 15%, we are still coming out with a fiscal year average of just below 7%, something like 6.8-6.9%. The reason for that is that we are pretty confident that the core rate on the manufacturing component in particular, which after all is nearly two-thirds of the index, is going to come down in coming months, probably not tomorrow, on a YoY basis. But I think it will come down perhaps near to 3% by the end of the fiscal year. It seems to me there is a lot more to come through from the weakness in international metal price inflation and weakness of demand. I don’t think those factors have filtered through yet. Q: When do you see the overall WPI number falling off 7%? A: You could say the impact of the weak growth is already being felt. If we look at the core rate of WPI and strip out food and energy as most countries, as the RBI presents their own core rate, it is sub-5%. On a sequential basis if we look at it three months on three months seasonally adjusted, according to us, it’s running at about 2%. So, there are really no underlying inflationary pressures and yet the RBI is clearly still very focused on this headline rate. I think that’s a mistake. I think interest rates are too high. They are too high for too long. It is damaging growth. What the last thing that should happen is if we get a lack of monsoon related spike in food prices, it should be seen as a highly regressive tax on consumers within India. That should be an excuse or reason to cut interest rates, not to keep them where they are. _PAGEBREAK_ Q: There are reports that Fitch now sees a 50% probability in terms of acting on the sovereign rating of India. We haven’t seen much of a movement in terms of policy as well. What is your analysis in terms of a possible downgrade that India could be looking at? What could the timeframe be? A: The rating agencies have India on a negative watch. They have indicated that they will make up their mind within the next 18 months or so. Clearly, they are looking for structural reform from the government and are looking for lower inflation rates. In my view, they don’t need to see much from the government in the way of structural reform and they don’t need to see much in the way of lower inflation. So, if the government can somehow manage to squeeze through a little bit of fuel subsidy increase or some progress on a couple of key areas like the GST and the Direct Tax Code, I think that should be enough to prevent it. I guess nothing can be taken for granted at the moment. The government seems to completely incapable of deliberating anything of meaning right now. Let’s hope Chidambaram can change it. He has talked very positively. But it’s no longer about talk. We desperately need to see some action, even if it’s just minor action. Q: What’s India’s potential rate of growth now? A: It’s about 7-7.5%. I think people’s estimates of trend growth are far too cyclical. When growth goes up, people’s trend growth estimates go up. When they come down, the trend growth estimates come down as well. I think the trend growth rate is much more stable. I had always put it at something in the order of 7-7.5%. I am very happy to stick with that. There is a negative output gap. The output gap is widening. It is disinflationary. Rates should be coming down.