Growth should rebound in next fiscal year, says RBS

The government has taken a lot of reform measures over the last one month. In an interview to CNBC-TV18, Sanjay Mathur, RBS says reforms will start impacting growth only in the next fiscal year. "We are looking at 5.2 percent at this stage. But, next year, the growth should rebound to around 6.5 percent level," he adds.

Also read: Significant chance of cutting India rating in future, says S&P Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Q: Where are you pegging growth at? A: We are looking at 5.2 percent at this stage. We do welcome the reforms. But, in reality, reforms will start impacting growth only in the next fiscal year. So, the logical trajectory, which we have at this point in time, is that we are 5.2 percent for now. But, next year, the growth should rebound to around 6.5 percent level. Q: Have you upped, therefore, the FY14 forecast in recent weeks? A: We really need to see the creation of the national investment board. We need to see how it functions, how it really starts to approve projects and not just approve, but how does it resolve the slew of issues that are there. For example, you can approve a power project, we need to see whether there is proper mining policy in place, whether the land acquisition issues are resolved around it. So, it is more of a wait and watch attitude at this point in time. We have been through these promises before. So, I really want to see that there is tangible action that takes place. In that case, we may even go beyond 7 percent. Q: What is fiscal deficit target for FY13? What do you think that we are going to end up with considering that now there is so much of uncertainty with regards to the divestment programme as well? A: We are looking at 5.5 percent at this point in time. It does, however, assume that disinvestment does not fall short of targets. Two areas will bite. One, despite the hike in diesel prices and the capping of the availability of gas cylinders, the energy subsidy bill is still going to be higher than forecast. Secondly, it is hard to see that tax collections can stay up with this kind of growth environment. Q: We have made no progress on the fiscal front at all. It is well agreed that it is one big cause of the kind of inflation that we have seen. Also, on the current account deficit, the last number of 3.9 percent may be lower than the previous quarter, but it is hardly flattering. With the rupee appreciating, if anything, there could be some danger to that number getting exacerbated. What is our own forecast of current account deficit? Would you think that unless these very deep macro economic malaise or gaps are bridged perhaps growth will not really take off? A: Not for this year. There are a couple of things around it. The first point you mentioned was about the rupee. It does not seem that the rupee, whether it is at 52 or at 55, will have a material bearing on the export performance. I think, for now, exports are really weak because of the fragile external environment. Secondly, we are still looking for the current account to narrow, but very modestly to around 3.2 percent. Now, that is reflective largely of the fact that domestic demand is weak. The big risk you carry here is that if inflation goes out of hand and we start to see gold buying again come up then we are looking back or going back to the 4 percent number. That would be quite disastrous. We haven’t seen much progress on fiscal deficit. So, how does it all add up? So, again it comes back to the fact that atleast the next six months to eight-nine months has to be a period of attaining stability rather than pushing growth. Therefore, for this fiscal year, we do see growth momentum being quite weak. Then a lot really depends on how the investor sentiment changes, what reforms we see and then we can really talk of growth. Thirdly, it also does not give that much of latitude for the central bank to be able to cut rates. We do think rates will go down. But as far as the policy rate environment is concerned, we could be looking at a maximum of about 50 basis points. _PAGEBREAK_ Q: Does it start as early as October 30 at all? A: There are different views depending on who is really speaking. But I think that, by and large, the central bank is becoming a lot more appreciative and complimentary of what the government has done. Q: What would your expectations be for September inflation figure? How do you expect the trajectory to pan out for the remaining part of the fiscal? A: We do think that inflation would probably be around 7.7 percent. Thereafter you will see a similar number for October as well, but then you start to see inflation gradually tapering off. One change, which you would probably see in the numbers going forward, is that headline inflation may remain at an elevated level. But core inflation should start to move down much faster largely because demand conditions are quite weak and corporate are going to have to be able to absorb the oil price hike rather than be able to pass it on. Q: If your FY13 average is 5.2 percent on GDP, we are already kicking in at 5.4 percent in the first half, are you expecting a sub-5 percent at any point, maybe third quarter? A: Eminently, quite possible at this stage. Q: We had all of these reforms, is it enough to ward off and S&P downgrade or does that threat does loom for us? A: It’s a close call. I don’t have a very strong view on this because at the end of the day what matters is going to be what sort of fiscal number we get towards the end of the year. There are a couple of things to keep in mind on the fiscal side. When a rating agency looks at it, it does not take in to account the disinvestment. So, whether we achieve the disinvestment target or not, it is not going to have a bearing. Secondly, if you look at the reforms that have taken place up until now, they are very slated towards enhancing investor sentiment. What will matter as how we get over the more difficult issues of domestic resource allocation which is land, mining etc. Simple liberalisation in capital account is unlikely to work.