6% GDP target for FY14 tough, inflation to ease: Deutsche

Taimur Baig, India Economist, Deutsche Bank expects June whole sale price index (WPI) to be around 5-5.1 percent. He believes the government's target to achieve 6 percent gross domestic growth will be difficult and expects 5-5.5 percent GDP growth in second half of FY14.

Speaking to CNBC-TV18 on the prospects of Indian economy going forward, Baig does not think the Indian economy has deteriorated further. "The fight on inflation has gone on for a long time and whatever upside risk we see on inflation right now would be temporary," he adds.

Going forward, Baig does not see significant pick-up in exports. He, however expects a pick-up in the industrial growth in the second half of FY14.

Meanwhile, he remains mildly constructive as far as the bond outlook is concerned. Below is the verbatim transcript of Taimur Baig's interview on CNBC-TV18 Q: What do the Index of Industrial Production (IIP) numbers from Friday tell you? Would it have any ramifications on the gross domestic product (GDP) growth that you are expecting for FY14?
A: It is looking sideways. One month a couple of percent up and next month a couple of percent down. Put it altogether, both the capital goods and overall IIP are just going sideways. The economy has not deteriorated any further and that is the best thing about India right now. We are at the bottom. The risk is that global market turmoil affects that part as well, but right now at least it seems like the best thing one can characterise the economy as something going sideways. Q: What have you pencilled in for the Q1 GDP print and how much of an uphill task do you think it is going to be for the second half to get anywhere near the 6 percent target?
A: It is going to be quite an uphill task. In the first couple of quarters in the low-5 percent, perhaps even a little lower and then in the second half of the year significantly higher than that to bring the 6 percent growth forecast that we have. This is built around not just a question of external demand pick up, but also on the expectations of higher real interest rates bringing in lot of flows to India, orderly materialisation of the current account as well as a revival of the investor sentiment because inflation does not seem to have a great deal of upside risk right now.
Although Friday's Consumer Price Index (CPI) data puts a bit of a spanner to that theory, but so far general outlook is for lower inflation rate to stabilise investment sentiment and the authorities doing a few things to help in that regard. Q: Do you think that even if we do not see a rate cut in July maybe three months out we will still see a small one?
A: By September, we will have a couple of more months of data that will again show the best case of a sideways, but even a slight deterioration in the outflow. I cannot see how the authorities cannot acknowledge that. They have virtually no tools on the fiscal side. They need to consolidate fiscally to maintain the CAD. Regulatory measures should encourage investment or interest rate cut to help the financing side of the economy.
In a tussle between lower growth and not so much weakening inflation trajectory which way would the RBI lean toward, on the growth side. The fight on inflation has gone on for a long time and whatever upside risk we see on inflation right now would be temporary.

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Q: What do you expect from the WPI, any shockers or do you think that will be a fairly tame figure?
A: We have looked at daily indicators of food prices over the last 3-4 weeks as corroborated with the CPI data, vegetable and few other prices have gone up. So we are looking at a bit of a pick up. We had 4.7 percent in May. We will see about 5-5.1 percent for the month of June. Q: What are the chances that the pick up that everybody is hoping for does not happen in the second half and we get stuck between 5-5.5 percent GDP growth? How much probability would you attach to that outcome?
A: There is a substantial probability to that. All over Asia, if one looks at the US Purchasing Managers' Index (PMI) one should see much greater export strength in all over Asia, but that has not been the case. The export cycle has been a bit of a peculiar one. Just because the US is doing well does not necessarily mean that we are going to see a big pick up in exports out of Asia at least the way we have seen in the first six months of the year.
Going forward there are two scenarios, first, the US does not do that well and then we do not have good exports, secondly, the US continues to do well, but the historical relationships have broken down and we still do not see a big pick up in exports and both of those scenarios are fairly negative for India's outlook. Q: How will this affect the bond market? How much yields could we get to in the second half of this calendar year?
A: I am not very worried about the fiscal outlook and by extension the bond outlook. This is because the authorities believe that they have to draw a line on the fiscal side, whether it is through fuel price increase or holding back other discretionary spending or moving very forcefully towards disinvestment or other revenue raising measures.
The authorities need to make sure that they do not get ratings agencies as excuse to worry about India at least on the fiscal side. From that perspective whether fiscal surprise on the downside or not, I am not too worried on the bond yields. Indeed inflation starts surprising on the upside.
We have some problems of inflation pass-through from the exchange rate depreciation then there is an issue. But even then our view is given how weak output is, given how weak pricing power is in most sectors in the economy the rupee depreciation would not lead to a big flare-up in inflation going forward. Therefore, we remain mildly constructive as far as the bond outlook is concerned. Q: We are heading into elections next year and the first signs of some kind of government spending are already quite visible. Do you think we could get some kind of a fiscal spending burst that might have ramifications for inflation in the second half?
A: Within the fabric of the Budget parameter, there is substantial revenue for plan spending, about 29 percent YoY increase in the plan spending side. We never thought that the government would actually have the capacity to increase spending in such an aggressive manner, but when one puts together the issue of the election related considerations maybe there is some scope to expect significant pick up at least on the plan side.
On the non-plan side it is hard for the government to go significantly beyond Budget allocations unless you have a big pick up in fuel prices globally and no adjustment in fiscal subsidies. So, there is some implication as far as the fiscal is concerned on the plan spending side, there could be a substantial pick up and that could have some impact on demand and by extension prices, but this is just a small chunk of the Budget.