Have lost faith in govt's intention to help RBI: Jim Walker

India’s Q1 GDP number is not one to be excited about, despite the fact that it came in above expectations. Growth is still considerably low, bogged down by factors such as low investment sentiment, poor business environment, high interest rates etc. Even though the economy grew at 5.5% in the first quarter, key factors such as capital formation and private consumption indicate that the actual economic condition is much worse.

According to Jim Walker of Asianomics, the fact that capital expenditure is not the factor driving growth in the country is a warning sign. He tells CNBC-TV18 that the lack of capital expenditure is due to the government’s inaction. “The reason that it is not good enough is because industry and businesses don’t like the way the government has been acting. The fiscal deficit has been running over the course of the last few years and is holding back on expenditure, and I expect that to continue,” he said. He further adds that there is no indication that the government is interested in calming market fears, and that there is a lack of faith in the government’s intent to help the Reserve Bank of India overcome economic hurdles. Also Read: Expect GDP growth to pick up in Q3 & Q4: C Rangarajan Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Q: What have you made of this 5.5% GDP number? If you looked at it from the demand side, which is from private consumption and capital formation, the actually number looks much worse. What do you read into this number? A: We look at capital expenditure as being the main driver of any economy in the world, and if capital expenditure is not the driving force behind GDP, then we think that something is wrong. Of course that’s the case at the moment with Indian GDP. We have seen it in the industrial production numbers for capital goods, which are running negative at the moment, and they don’t look as if they are turning around When we look at the capital expenditure side, certainly this number is not good enough. The reason that it is not good enough is because industry and businesses don’t like the way the government has been acting. The fiscal deficit has been running over the course of the last few years and is holding back on expenditure, and I expect that to continue. Q: One of the biggest Indian companies believes that it could take a very long time for things to improve and for capital investments to come in. What is your sense therefore of the market? Is this going to be a long lean patch or do you think liquidity can make some kind of a difference? A: I am not sure that there is going to be that much liquidity around. I certainly don’t see the prospects of the RBI cutting interest rates particularly quickly at this stage in the cycle, because there is just too much in the way of inflation pressure still within Indian economy. It is not just in terms of the WPI and CPI, but also the pick up in monetary aggregates and credit aggregates over the course of the last few months, and that will make them a bit weary of cutting rates too quickly. Even the weakness in the rupee and the weight of that feeding through into certainly higher oil prices and if not higher food prices as well. Given what’s been happening with drought in America and food prices worldwide, there is not much stimulus I think coming from the liquidity side. What really needs to happen in order to change sentiment around is for the government to be very clear on controlling the fiscal position and trying to get things back under control from a government spending angle. It would also help if the tax position was becoming much clearer. The introduction of the Direct Tax Code (DTC), the GST etc. I think there is so much that could be done on government’s level to make people feel much more comfortable about the outlook for the Indian economy and for Indian companies. But there really seems to be no indication that this government is interested in calming market fears or appealing to foreign investors. It has turned them off and draws over the course of the last few years with its inactivity and all the corruption scandals. Until that changes, I am afraid I think the market is going to be struggling. _PAGEBREAK_ Q: Do you think that rating agencies will wait for the next budget to make a rating action or do you think they will not be as backward looking? Do you think a downgrade is a possibility before the next budget itself? A: I think probably they are going to wait until they see what’s happening with the actual fiscal deficit numbers are, and I don’t really think they are going to act before that. My impression would be that if we hit above 6% on the fiscal deficit, which I am pretty certain is going to be the case, then there will undoubtedly be downgrades very rapidly. But of course everybody between budgets is never very sure of what the actual fiscal position is in India. I think you could get announcements from some of them that are putting India on negative watch which is just as good as a downgrade. Q: The other big thing that now the markets are obviously watching out is what to expect from Jackson Hole. Do you think even that central bank can oblige or should oblige much at this juncture? Do you think the markets would have waited in vain? A: The markets seemed to think that lightening strikes twice in the same place. Last year we heard Bernanke suggesting that a QE2 is going to go ahead and he did that at Jackson Hole. That was a great surprise to the markets, so they were boosted following the Jackson Hole meeting and then we got the QE2. This year of course, as I said that, they have been expecting lightening, so if Mr. Bernanke doesn’t deliver it over the weekend, which I fully expect him not to, then I don’t think there is a floor under these markets. They all want more money, that’s all they think about. They don’t seemed to have any concept of what’s happening in the real economy at all. If we were talking about 5.5% GDP growth in India three years ago, we would have been laughed out, and quite rightly so. In China, where they report numbers like 7.6%, my guess is that they are growing at half the rate of India. In Europe growth is contracting, in the US growth is at 2%. These are terrible real economy numbers to the extent that basically the global economy is under recession, and yet markets go up because they hope that Mr. Bernanke is going to give them an extra few hundred billion dollars. The economy is not mended after five years of them trying the same trick over and over again. At some point, markets are going to realize there is nothing to this trick except their own belief that may at some point work, which is obviously the definition of insanity. Somebody doing the same thing over and over again and expecting a different outcome just doesn’t happen. Markets I am afraid have left themselves open to a big correction. Q: On the European front, while it is known that it is going to be a very slow grind in terms of growth, increasing noise from the ECB or even policymakers seems to be supportive. Do you think in that a catastrophe maybe averted? While there may not be much improvement in the near-term, but at least a euro crackdown or a breakdown has been averted for the near-term? A: Again supportive of equity markets, and to a certain extent bond markets, the stuff that they are coming out with is in no way supportive of real economies. What they are suggesting in terms of buying the bonds of peripheral governments or unifying the way that they look at the banking system etc. this is fiddling around the edge of the real problem in Europe. The real problem in Europe is of course the periphery is too expensive relative to Germany. State of Germany has to inflate away its competitiveness or the periphery has to deflate away its uncompetitiveness. That of course means that we are in for a long period of zero growth, actually negative growth in Europe and real pain. Actually what the ECB is suggesting now of relieving some of the pressures on peripheral governments is basically going to make matters worse because the deflation has to take place in order for Europe to recover. The more they pull off the point of deflation, the longer it takes to recover. Q: When is the earlier time the Reserve Bank may get some elbowroom at all to help the economy? A: I think the longer this kind of activity level goes on, it’s inevitable that inflation will fall; inflation in the sense of monetary growth and credit growth. That’s probably going to become much clearer over the course of the next six months, and at that point we will see the RBI taking much more aggressive measures to cut interest rates. The unfortunate thing that baked into the cake just now is that a significantly slower economic growth rate for India this fiscal year than anybody would have thought possible even one year ago. So the RBI will be able to act, but given the governments over the course of the last few years, it really needs very clear, very decimal economic numbers before it can go out there and starts stimulating the economy. If the government would just help it somewhat, then it could act much more quickly. But I have lost faith that the government has any intention of assisting the RBI. RBI is the only economic manager out there for India. That’s not such a bad thing in my view, I think the RBI does a great job normally, but at the moment its hands are tied behind its back.