Not optimistic about rate cuts from RBI: ICRIER

Slowing growth, high inflation and a sorry state of the economy has been playing havoc. Along with that, a not so good monsoon has started to ink fears of lower agricultural output. In an interview with CNBC-TV18, Shankar Acharya of ICRIER said the monsoon situation is worrying and by the end of July, a clear picture is likely to emerge.

Acharya also expects some pressure on agricultural product prices. He feels, looking at the current condition, 4% growth looks difficult for the agricultural sector. Further, he adds that the negative outlook on the monsoon makes is very difficult to be optimistic about food prices and inflation. Moreover, Acharya is also not very positive about a rate cut from the RBI.

For the government to make any headway in the policy front, Acharya feels, the time after the presidential elections would be crucial. And it would be rather disappointing if nothing is announced post elections. Since state elections are scheduled for the later part of the year, it is going to impact policy making, he opines.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Lot of talk about interest rates but before we do that - first your thoughts on what you have observed so far in terms of the monsoon progress and how critical that could be given the sticky inflation problem that we have had for many months now?
 
A: I think the monsoon is certainly at a very worrying stage. We all know the numbers right through June and indeed up to the first week of July and it is not looking good. But those of you who want to be a little more optimistic point out that you have to wait for at least mid July and perhaps even end of July to know how good or bad the monsoon is likely to be.

The reason why I think the weight has now shifted to a more pessimistic assessment is that there is an added worry about the effects of the El Nino in the second half of the four month monsoon period. Adding all those together, it is hard to be optimistic about the impact of the monsoon.

As you point out on the in terms of its economic impact, of course as well as hardships for farmers and so forth, it could be significant from the economic point of view. It suggests that there is no question of 4% growth of agriculture as planned by the government this year.

How much less, it is hard to tell at this point and that is going to be linked with pressure on agricultural commodity prices including food prices. It is not a pretty story at the moment.

Q: The counter view to that which a lot of economists have put forward is that given the kind of movement or changes we have seen in minimum support prices (MSPs), maybe this time the ripple effect of a less than average monsoon may not be too pronounced, would you agree with that assessment?

A: I think when it comes to MSPs, the ripple effects and so forth, you have to bear in mind that the effectiveness of the MSP is limited to two-three crops, particularly the food grain crops. For the other ones, it is not clear whether MSPs do get announced and they have some impact. It is not clear whether that impact is a very significant one. I think the jury is out on that.

Q: What is your own assessment of how the inflation situation is panning out now given that food prices have started inching up or ticking up again, how much longer do you expect us to be in this sticky inflation situation, which does not give the Reserve Bank of India (RBI) the elbow room to move?

A: Given what we know about the uncertainty and possibly with the negative outlook on the monsoon, it is hard to be optimistic about food prices in particular and inflation in general. Against that background, it is equally hard to be optimistic about any significant reduction in things like repo rate by the RBI. I cannot offer you too many silver linings on that side.

Q: You said 4% will be difficult on the agricultural front, last time the gross domestic product (GDP) number came out there was some moderation in the services front as well which has been the big pillar for our GDP number, should one be revising targets even lower for GDP for this year?

A: I would say wait till the end of July for the following reason that the window between now and at least after the presidential election and the week or so immediately after is in a way almost the last window for policy action by the government.

As we know in the last two weeks, ever since the prime minister took over the finance portfolio, there have been a lot of positive noises from senior people in government about various kinds of reforms or rule back of unpleasant elements of what happened in the budget in March and so forth. Yet, we all know the political constraints that operate and which have stalled various reform moves in the last few months.

One would have to wait and see how much political strength or clout the government can muster and what it can push through in that short period after the presidential election, possibly before the beginning of the monsoon session of parliament. After that we have a series of state elections. It is a small window but, I would certainly give time till the end of July, before dramatically changing assessments of the growth outlook.

Of course one element of that will also be more clear, which is the monsoon. I think that is the time to reassess.

Q: What is your own sense- from whatever you have been reading, hearing - do you think we are in for some policy movement finally post the presidential election, particularly on issues like diesel price hike etc which the Reserve Bank itself has been waiting for sometime now?

A: I think it would be quite seriously disappointing if something does not happen on diesel prices after the presidential election. Whether it will be a modest token amount or something significant, it is very difficult to tell at this point.
 
I would be surprised if nothing happens and very disappointed. But, at the same time, I am unable to give you any kind of rumored assurance that something significant will happen. We just have to wait. It is a fluid situation, we know politically as well and it is clear that if we have a disappointing outcome in that week or two after the presidential election, we are in for a very difficult time in the economy.