Jan IIP: See muted growth, marginal rate cut: BNP Paribas

The Index of Industrial Production (IIP) expanded by 2.4 percent in January against a contraction of negative 0.6 percent in December. Richard Iley, Chief Asia Economist at BNP Paribas believes although, growth is likely to creep up to positive territory, it is going to be very slow for the industrial sector and the economy as a whole.

Also read: Jan IIP better than expected, but Feb CPI inflation worsens
Iley said, "Annual growth rate for industrial production will pick up to about 1 percent in positive territory. It will be back in the black at least, but still very weak, it will still be shy of the rates of 7-8 percent growth that we would ideally like to see and that is required to really get the economy operating back on full throttle."
Besides, looking at the inflation data over the last few months, the Reserve Bank of India’s scope to lower rates is pretty cramped, feels Iley. Here is the edited transcript of the interview on CNBC-TV18. Q: Do you expect the industrial data to remain weak for a few more months here?
A: I think that has to be the base case expectation. Like the market we are expecting to see some improvement in terms of the annual growth rate. We think that will creep up into positive territory. But, it is going to be very slow for the industrial sector and for the overall economy. Q: What is the figure that you have pencilled in for this month? Last time around, we had registered a negative tick.
A: We should see that annual growth rate for industrial production will pick up to about 1 percent in positive territory. It will be back in the black at least, but still very weak, it will still be shy of the rates of 7-8 percent growth that we would ideally like to see and that is required to really get the economy operating back on full throttle. Q: Over the course of today and tomorrow we will also see the inflation trends both on Wholesale Price Index (WPI) and Consumer Price Index (CPI), how do you think that may shape up?
A: I think there is a very interesting story on inflation beginning to unfold this year. We have seen considerably good news on core WPI inflation. The non-food manufacturing goods numbers that the Reserve Bank of India (RBI) tracks, which they consider to be a useful gauge of core inflation has fallen very significantly and it is consistent with slack growth in the economy. It is also consistent with what economists call a negative output gap beginning to open up.
One problem that the RBI have got is the headline rates of inflation, both at the WPI level and particularly at CPI level are proving much more recalcitrant and I think this widening wedge, particularly from core rates of inflation at the industrial level to headline rates of inflation at CPI do mean that RBI’s space to lower rates is going to continue to be pretty cramped.
_PAGEBREAK_ Q: Are you expecting a pause next week or do you think there might still be a 25 basis points reduction?
A: I think they have got room to bring the rate down by probably half a percent over the next three to six months. I would expect to see another quarter point move in terms of the repo rate at next week’s policy review and then another quarter point move maybe in the first quarter of the next fiscal is very much on the cards.
Interest rate cuts beyond that are difficult to argue for until we see much more downward progress and stubborn measures of headline inflation, as I was just alluding to. I think one thing that RBI is particularly focused on and one reason why we are not seeing so much movement on headline rates of inflation is that households’ inflation expectations still remain very elevated.
That is to some extent a product of stubborn food inflation, but also effect of the experience of high inflation that India has had over the last three to four years. Hence, downward movement in those measures of inflation expectations is very important from RBI’s perspective to free up more space for rate cuts. Q: You would have seen the trade deficit numbers yesterday, are you getting a sense that the Current Account Deficit (CAD) will come down to manageable proportions over the next few months or is that a big macro hole in India which will require some fixing?
A: It is a big macro hole. I think that the calendar Q4 last year probably will be the worst for the current account. We will get those data towards the end of this month. My forecast is that number will be an absolute shocker relative to GDP. It could be more than 6 percent of GDP.
As you say, the latest trade numbers are encouraging. I think there will be an improvement in the final quarter of fiscal 13 and into this year. But, we are still talking in USD terms and the current account is going to stay very wide over the next year, around USD 70-75 billion.
What is interesting is the language we used, is it manageable? The moment it has largely been manageable, there have been inflows from rest of the world to cover the Balance of Payments (BoP). We have not seen significant downward pressure on foreign exchange reserves so far, but we have been in a very benign global environment and the ever present fear for India and for the rupee in particular is that at some point over the next year we will move into a less benign environment, maybe as a function of the Federal Reserve in the US switching off quantitative easing or maybe as a function of renewed turbulence in Europe.
At that point, financing this wide CAD which may have peaked relative to GDP, but is still big in dollar terms could become much more problematic. Q: The big body blow in terms of sentiment was the number we delivered on GDP. Has BNP Paribas significantly brought down its growth targets? Where do you see the GDP tick moving to?
A: Yes, it has. That has been a pattern over the last 12 to 18 months, there has been serial downward revisions on GDP. I do remain optimistic that the last quarter was the bottom. We have talked about IIP moving up at least back into the black. I think there is a very slow but, nonetheless important sequential improvement happening in the economy albeit from a very low base.
But, in terms of annual averages, our numbers have come down. We now see fiscal 13 at a touch below 5 percent, at 4.9 percent. That is pretty much in line with the official Central Statistics Office (CSO) number. I do think there is a pick up for fiscal 14, but it is going to be slow progress. We are looking at a number of about 6 percent for fiscal 14. Growth numbers are coming down, hopefully the worst is past, but any pick up in the economy will be pretty laborious I fear, moving forward.