Expect to see 5.5-6% growth in FY14 also: ICRIER

As economic growth continues to trough out, Shankar Acharya of ICRIER expects 5.5 to 6% growth in FY14 as well. According to him, the underlying stress factors continue to press on the economy and therefore, chances of seeing a change is limited. However, he feels it is too early to comment if the Indian economy has already troughed out.

Also read: GDP to probably exceed expectations in 2013: Goldman Sachs
Besides, Acharya also does not expect the investment side to pick up soon or any sharp reduction in interest rates in the near-term. "I think we will see 2012-13 borrowing by the government in excess of what was budgeted. Even though, till now the government’s statements have said that will not happen and with that sort of fiscal strain and stress, I do not see even inflationary pressures really coming down or for that matter interest rates, particularly at the medium and long-term end coming down in any significant manner," he explained.
Acharya further opined that the order books of equipment supplier companies are weakening Here is the edited transcript of the interview on CNBC-TV18. Q: We have been asking a whole spectrum of economic observers whether they think that the economy has actually troughed out or is troughing out. What are your thoughts on that?
A: I think that in a way it is too early to say. We have seen a slowdown over the last two years from a 9 percent growth rate to a 5 percent plus annual growth rate and I do not see this changing in a hurry. I know that some analysts are saying that in 2013-14, we will see the Indian economy back at 6-6.5 percent rate of growth which will be a lot better than what we are seeing now. It is possible, one cannot rule it out, but frankly I am less sanguine about that outcome.
I would more likely expect 5.5-6 percent range for the coming year as well. My reasons for doing so are basically the underlying stresses which I see. They are continuing and the signs that investment continues to weaken are all there for us to see. The signs that the fiscal correction that we have long wanted, desired, recommended and at one point looked like there would be serious action on that does not look so promising.
I think we will see 2012-13 borrowing by the government in excess of what was budgeted. Even though, till now the government’s statements have said that will not happen and with that sort of fiscal strain and stress, I do not see even inflationary pressures really coming down or for that matter interest rates, particularly at the medium and long-term end coming down in any significant manner.
I do not see a pick up on the investment side. On the exports side the story still looks to be of seeing decline or stagnation from previous years. On consumption, it seems to be holding up but, I am not sure that we will see a big boom in it. Recent automobile sales figures certainly does not suggest that November was a good year for cars for example. Putting it all together, I do not see the sort of dynamism that perhaps others are seeing. Q: What would that tantamount to in terms of how much rate relief the economy should expect in that case? If you believe things are still not on recovery track, is it also going to be an extremely slow rate cutting cycle that we enter come next year?
A: You are referring to rate cutting or what the RBI does, I think that is only a part of the story of how we get to lower interest rate levels. My own view is that a bigger part of the story rests with what we can manage on the fiscal side.
Essentially, as long as government borrowing remains at such high levels as we have seen in the last 2-3 years, I just do not see how medium and long-term interest rates can trend down significantly. It is true that the RBI can affect short-term rates for a while by its actions. But, clearly it will be constrained from doing much on that as long as the fiscal situation remains loose and as long as inflationary pressures persist partly because of the fiscal excesses.
 
So a short answer to your question I guess is that I am not so hopeful that you will see a sharp reduction in interest rates coming from the side of actions by the RBI.
_PAGEBREAK_ Q: You spoke earlier about the investment cycle. Since September there has been some improvement in sentiment because of what the government has been trying to do. Do you think that is getting to a point where the investment cycle might get kick-started or do you think it is only on the margin in terms of sentiment, not enough to address the investment issues that we have been grappling with?
A: I guess I would agree with the latter part of your question. It looked like there was going to be a change in sentiment from the actions in September, but I have a feeling that the impact of that has really been more on the markets, in particular the equity markets which have read these signs very positively. Of course, as you know we have seen significant flows of FII money into the Indian market.
It is not clear whether Indian players, individuals or institutions are similarly motivated in terms of putting money into equity. But, I think when it comes to a pick up in the real investment on the ground, I do not think that is the story when one talks to the major suppliers of capital equipments. Their order books do not seem to be very strong. They seem to be weakening.
It is not the story one gets if one looks to the debottlenecking of the infrastructure problems that we have in areas like coal, power and so forth. Perhaps something is moving and perhaps we will see some outcome from those efforts in the government side. But, to me it is not yet clear that we have crossed the problems and the whole telecom sector which used to be such a wonderful story two-three years back still seems to be mired in uncertainty, regulatory and judicial issues.
So it is hard to see that kind of taking off. We saw the results of the last 2G re-auction which certainly do not look wonderful in that important area of the service sector. Q: What do you think will remain the lingering concern going into next year, the bigger challenge? Does it remain the kind of growth we have been slipping to or will it still be inflation?
A: I think both of these concerns will remain and possibly a concern which seems to have dropped off the radar for reasons which I cannot understand is that mainly our external sector vulnerability will continue to be a significant concern as far as I am concerned. Somehow people do not seem to be either speaking or writing too much about the fact that our current account deficit is above 3.5 percent of GDP and could end the year in that range of 3.5-3.4 percent which was last year attended at 4.2 percent.
These are extraordinarily high levels, which have never before been attained in India and all this financing that has to be done has to come from somewhere. We seem to be relying more and more on portfolio flows of one kind or another, either into equity or debt both of which in a crunch are reversible. I think that sort of concerns of external vulnerability will also continue ahead.