HSBC says 8% GDP growth will take 3 yrs, cuts FY14 forecast

HSBC has cut India's FY14 growth forecast to 5.5 percent from 6 percent. Speaking to CNBC-TV18 on the issue, Leif Eskesen of HSBC says ineffective implementation of reforms and lingering global weakness led to a cut in the forecast. 

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Eskesen, however, is bullish on the agriculture sector and sees it grow from 5 percent to 5.5 percent for FY14. He believes it will take another three years for India to get back to around 8 percent growth due to slowdown driven by structural factors. "There were not enough investments in basic infrastructure, implementation of structural reforms which are important for the growth potential of the economy," he says. Below is the verbatim transcript of Leif Eskesen's interview on CNBC-TV18
  
Q: What is the reason for such a pessimism?
A: There are a couple of factors responsible for scaling back our growth forecast. Firstly, if you look at the high frequency indicators, so far for the first quarter of the fiscal they suggest that the growth is going to be more or less in-line with what we saw in the final quarter of last fiscal effectively. So, there is still sideways movement on that front.
I would also expect that the implementation of reforms even though we still expect it to continue, may not happen as quickly as we have seen up until this point. There could be some slowdown in the implementation side as well when it comes to structural reforms.

Secondly, the global economic weakness is going to linger for somewhat longer. So, the sideways movement in growth will continue a bit longer. We will have to be a bit further into the fiscal year before we start to see a pickup in growth on the back of the reform momentum seen so far. We are still looking for a recovery in growth, it would just come a little later and will be flatter that what we had assumed previously. Q: Can you just break up your estimates in terms of agri, services and industries for FY14? Where do you see the pressure coming in from?
A: In all cases, we are looking at recovery in most of these sectors. In agriculture there will be a little bit of a normalisation from last year. In the last fiscal it was 5 percent and would be going upto 5.5 percent. So, a little bit of a recovery in agriculture.
Industry will also look at some progress and a part of it would come later in the year as the global picture improves. But, progress on structural reforms will kick-in and support the industry sector.
In case of services, the growth rate would be more or less in line with what we saw in the last fiscal year.
There will be a little bit of a pullback when it comes to government-related services as part of the efforts to contain the fiscal deficit. Then there will be a slight recovery in other services, particularly the financial services and also trade and business-related services.
We have a bit more traction on domestic demand - both on the investment side of it and also a bit late in the fiscal year on the consumption side of it, but it is going to be a quite protracted recovery.
_PAGEBREAK_ Q: Do you see an upside or a downside target to this 5.5 percent?
A: Right now, the risks surrounding this outlook are broadly balanced and that is one of the reasons why we took our forecast down. We thought the downside risks to the existing forecast were sort of dominating the upside risks. So, we rebalanced that forecast in-line with the balance of risk as well and therefore, its more evenly balanced now. Q: We are getting the Q1 FY14 gross domestic product (GDP) data on August 31. What do you expect in terms of a quarterly breakup going into FY14 for Q1, Q2, Q3 and Q4?
A: We are looking at the Q1 coming up at 4.8 percent. So, we are looking at the same growth number in sequential terms. Quarter-on-quarter, adjusted number will also be similar to what we saw in Q1 and the last quarter of this fiscal.
Again, if you go a bit further in the Q2, 5.2 percent, the Q3 of the fiscal 5.7 percent and then in the final quarter of the fiscal we are looking at 6.1 percent. Q: What about agri because it seems like the monsoon has started off on a good note. It is two days before schedule. Would you then assume that agriculture could possibly have an upside swing in terms of FY14 GDP?
A: That is a possibility. What we have assumed for now is assumption of relatively normal monsoon. So, there will be an uptick in the growth where we have agriculture relative to what we saw last year.
If it turns out to be better than normal it could be little bit on the upside on that front but not necessarily to a great deal. We have already factored in some uptick in the growth for agricultural sector. Q: How long do you expect this protracted growth to continue for India? Will it also be seen into FY15? Any preliminary estimates that you are working with now?
A: We have 5.5 percent for FY14. 6.6 percent for FY15. So, it is going to be another three years before we are back to around 8 percent growth. The reason for that is simply that the slowdown in the first place in India was driven by structural factors becoming more binding. There were not enough investments in basic infrastructure, implementation of structural reforms that are also important for the growth potential of the economy and have not been implemented.