See Q1 GDP in 4.5-6.5% range: Credit Suisse

The April-June quarter gross domestic product (GDP) will be announced today. In an interview to CNBC-TV18, Robert Prior-Wandesforde, Credit Suisse says his expectation is 5.8% largely on account of base effect. "It is very difficult to pinpoint this number. It could be in a range of 4.5% to 6.5%," he adds.

Q1 GDP: Are we in for a shocker?

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy.

Q: What is the number you are going with today?

A: We have 5.8%, somewhat above expectations, largely on the base effect. But frankly it is very difficult to pinpoint this number. It could be in a range of 4.5% to 6.5%. We knew already that the quality of this data was poor. I think that has been further reinforced by the significant revisions, not least to that March quarter of 2009 where gross domestic product (GDP) growth was taken down by more than 2% points.

It is frankly anybody’s guess. I think the high level of uncertainty is reflected in a fact that the consensus is exactly the same as the previous quarter. On fundamental basis, I find it hard to see what is going to drive any meaningful improvements anytime soon.

Monetary policy isn’t helpful, fiscal policy isn’t helpful, and the oil price isn’t particularly helpful. If anything that is moderately helpful, I think is the exchange rate.

Q: But your 5.8% is still the highest number that we have, among the economists that we have polled, so did you go with more than 8% number on services?

A: Yes, that is important. One thing we have seen is the service sector PMI has held up reasonably well over recent times. That keeps a little bit of optimism. But I wouldn’t overemphasise this.

The key point is that I think it is going to be weak. Any number starting with 5%, even three-four months ago, would have been largely inconceivable. Now, 5.8% seems high. I think that it is just an indication of how far expectations have changed now. I also wouldn’t rule out a number beginning with 4%.

Q: What is the expectation on the agricultural front? Do you think this is the quarter where the dropdown happens or do you think that happens Q2 onwards because of the monsoon related issues?

A: Yes, I think it is probably a bit later. Looking at the historical relationship between agriculture output and rainfall and droughts and so on, there certainly is a positive correlation. In 2009, the last time we saw a drought and that was the third worst drought since 1901, agricultural output in the fiscal year as a whole rose by 0.7%. Sometimes you can have rainfall that is only marginally below average and you get a much bigger fall in agricultural output. So, the relationship is by no means perfect. The stronger relationship here is what happens to agricultural output after a drought. You normally see a very big bounce in output the year after a drought year.

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Q: Do you think today’s GDP number, wherever it is, anywhere between that 5.2% and 5.8% band, will be an important input for the Reserve Bank of India (RBI) for its September 17 meeting or do you think it does not matter in that range, the RBI is too focused on inflation?

A: Certainly, if you have to believe Subbarao, he continues to pay hugely more attention to the inflation number than he is to growth numbers. So, you would require a very big downside surprise for to have any real impact on the decision making at the September meeting. Interesting question to address as exactly how weak would growth have to be for Subbarao to cut rates at this stage, assuming inflation is around these kind of levels.

If we have to take him at his words then even a number beginning with 4% for growth may not be soft enough. My fear here is that the weakness of growth just isn’t feeling through in a normal sort of way to inflation. We may need to see a huge growth sacrifice rather than the small growth sacrifice that Subbarao talked about the other day in order to squeeze down inflationary pressures to a tolerable level. If that is right then clearly it is extremely bad news for everybody.

For complete interview, watch the video.