Maintain India's FY14 GDP growth target at 5.5%: HSBC

HSBC Markit Services Purchasing Managers' Index for India fell to 47.9 in July from 51.7, Leif Eskesen, HSBC Global Research believes that investors confidence is waning domestically because of weak macros - imbalances in the economy and high consumer price index (CPI) inflation. The Indian service sector suffered a fall in activity in nearly two years in July, hampering chances for a recovery in growth in Asia's largest economy.

"We have not yet seen the impact of the structural reform measures that have been announced in terms of traction on the ground of growth," he says in an interview to CNBC-TV18.
Eskesen maintains his FY14 GDP growth target for India at 5.5 percent, but cautions that if there is no recovery in manufacturing and service sector then this estimate may fall further. Below is the verbatim transcript of Leif Eskesen's interview on CNBC-TV18 Q: How seriously would you take the July PMI numbers? Is it really representative of a downturn in the services segment in the sense of contraction because previously when we got a contraction the gross domestic product (GDP) numbers didn’t show contraction, they only showed slowdown?
A: That doesn’t necessarily have to be a one-to-one correspondence between the two because this is also a monthly number so it would have to be over full quarter and it showed sequential growth rather than year-on-year growth.
Also, there is composition of differences but leaving all the technicalities aside, this is a significant contraction now, first time we have seen in four-and-half-years for the services Purchasing Managers’ Index (PMI) and it is driven both by new business flows so, demand effective is softening and also contracting month-on-month and also less optimism among businesses about the future effectively and that is what is behind this.
You are also at least more on positive side due to the slowdown in growth. Because of the weakening in demand, we did see some easing off in inflation pressure and service sector both when it comes to input and output prices but it is quite clear that growth is been weighed down quite heavily by lingering inflation pressures and also the high macro economic uncertainties seen on the back of both lack of impact from structural reforms but also lingering global economic headwinds that we have. Q: What are you looking at in terms of GDP number in the current year and are you on the front foot to lower that as well?
A: We have 5.5 percent for the current fiscal year for a while. Q: What is the assumption of industrial growth in that?
A: I do not have it right now but the Q1 of the fiscal year has panned out more or less inline with expectations in terms of underlying assumptions and that is why we have 4.8 percent growth.
The start of Q2 for this fiscal year suggests that the downside risk to 5.5 percent forecast we have for the whole year. There is no traction on recovery in manufacturing sector, service sector now looks doubtful as well with these numbers. So, on balance there is a downside risk to the 5.5 percent that we have.
Q: It’s the service sector which has been proving the support to the Indian economy over the last two-three years. Now you have figured July 47.9 lower compared to 51.7 on month-on-month basis. Does it get worse on the services PMI front? What is your sense in the coming few quarters? Will we tip lower than the 48 mark on services?
A: There is certainly a risk there. The key thing right now is that confidence is waning domestically because you still have imbalances in the economy, inflation is still too high especially when you look at the consumer price index (CPI) inflation.
We have not yet seen the impact of the structural reform measures that have been announced in terms of traction on the ground of growth.
We also have external concerns surrounding the currency, the current account deficit as well. So, that creates macro economic uncertainty that filter through to consumers in terms of their willingness to spend, business, in terms of their willingness to invest. So, we have to breakout this confidence deficit that is now overshadowing things.