2016 growth will be marginally higher than 2015: Citibank

From almost a 10 percent average inflation in 2014, consumer price index (CPI) came down to an average 5 percent in 2015 while current account deficit fell from 5 percent of GDP to around 1.5 percent. With a growth of over 7 percent throughout 2015, the year has been satisfactory for macros. But will the coming year be as positive as the year about-to-end. In an interview to CNBC-TV18, Samiran Chakraborty, Chief Economist, Citibank, says though India will continue to recover among the emerging markets, a global economic growth will remain an external headwind for the country. However, he believes Indian economy is seeing a cyclical pickup and the country's economic growth is being driven by public investment and urban consumption. "So, if these cyclical and structural factors are put into place then probably we will be able to counter the external headwinds better in 2016 and that is why we have taken a view that growth will possibly be marginally higher in 2016 compared to 2015," he adds. Meanwhile, Former RBI Deputy Governor Dr Rakesh Mohan does not expect inflation to decrease drastically on the back of issues concerning commodity and oil prices. Furthermore, a large wedge between the producer price index (PPI) and the CPI globally, is worrisome from the inflation point of view, Mohan says.  On the banking system, Anada Bhoumik, Chief Analytical Officer, India Ratings and Research, says that profit and loss will continue to be under pressure not just next year but in the foreseeable future. However, Bhoumik adds: "The changes in the recent years should improve the transmission ability of the banking system."

Below is the transcript of Dr Rakesh Mohan Former Deputy Governor, RBI, Samiran Chakraborty Chief Economist, Citibank and Anada Bhoumik Chief Analytical Officer, India Ratings & Research's interview with CNBC-TV18' Latha Venkatesh.Q: Since you have just worn your hat in the IMF as a representative of India and the adjoining countries, what is the sense you are getting of the global economy? Will it once again be anaemic and be a hindrance to India growth?Mohan: The prospects for 2016 are more uncertain than I think they have ever been in recent years. On the one hand you have a reasonably constant US recovery. There is also expectation of Europe doing a better recovery in 2016 than they have done in the last couple of years. Japan remains a question mark.On the emerging market side, India is clearly continuing its recovery. Brazil and Russia are question marks although the IMF does expect improvement in both of those countries which have indeed recorded recession in 2015. China of course is the biggest question mark. It will continue growing at a high pace, between 6-7 percent as of current expectations. So, as you mentioned the IMF forecast for 2016 for the global economy is 3.6 percent as compared to 3.14 percent in 2015. In that for the advanced economy it is 2 percent in 2015, 2.2 percent in 2016. A better improvement for the emerging markets, from 4 percent to 4.5 percent.Having said that there are also some doubts that some observers have, not the IMF but some observers do have some doubts about the US economy recovering on a continuous basis. Recovery has indeed been going on for a significant period of time which is already longer than most recovery periods recorded for the US economy. So, there are some observers who are saying that the recovery is no aged and it might well period out.So, in that context the other main source of uncertainty is that US Fed has of course started its normalisation process with 0.25 percent increase last week. The expectation is that they will increase by 100 basis points over 2016 but the question remains that if indeed the US recovery is not as robust as is currently expected by the US Fed, will they again pause?Q: The global economy is what let down India in a sense. The domestic economy at least was better than the previous year. How about 2016, should we expect the globe to be a help or a hindrance? Chakraborty: Our view is that probably the global economy remains on a slowish pace for another year. If that is the case then the external headwinds are going to remain for India. The positive side for India is that we are seeing some early signs of a cyclical pickup. So, if some of the structural reforms that are put in place over the course of 2016 or for that matter some of the things which have already happened in 2015, we could see the lagged impact of that in 2016. So, if these cyclical factors and the structural factors are put into place then probably we will be able to counter the external headwinds better in 2016 and that is why we have taken a view that growth will possibly be marginally higher in 2016 compared to 2015.Having said that the difference in our growth rate estimates are so marginal that it could be almost imperceptible in terms of its actual feeling and that is why we have to be going through this process of deleveraging which we are in the middle of now for a considerable period of time before we can move into structurally a higher growth path. If you look at it today we are in an uneven growth path where public investment and urban consumption are two drivers of growth whereas private investment and rural demand seems to be the once which are facing headwinds.So, if we want to burst on all four cylinders then clearly deleveraging has to help the private investment side.Q: Fiscal deficit - the mid-year review gave the impression that the only way to kick start growth would be to increase fiscal deficit. Two questions, one, is that a good argument? Two, what is your sense, will we do 3.6 or 3.9 percent fiscal deficit in the next year?Mohan: What is important to look at is that if we do increase the fiscal deficit or keep it the same, will it be through public consumption or public investment? I would clearly say that we should completely desist from not reducing the fiscal deficit if it is because of public consumption increase. However I think that if indeed we can step up public investment both in the railways in particular, also in other aspects of public investment then I think that we could possibly consider slowing down the path of fiscal consolidation.Q: A very quick answer on whether you think the market can absorb a 3.9-4 percent deficit even if it were for investment and then what will be the impact on inflation?Chakraborty: The problem with this fiscal arithmetic is that it starts off with 0.3-0.4 percent of GDP additional spending on public consumption because of the pay commission effect. So, to neutralise that public consumption and keep on raising public investment, it is a tough balancing act between having the fiscal credibility versus some kind of a fiscal stimulus into the economy. We have to keep in mind that last year also we had pushed the fiscal targets by one year. So, if on two consecutive years we kind of veer away from the fiscal path then it could have some implications from the rating agency perspective.Having said that the critical part is its impact on inflation and the bond market. I think on the inflation part as long as the investment component is relatively higher compared to the consumption component we should be more or less okay. My bigger worry is on the bond market side where not only will the net supply of bonds go up because of 3.5 percent becoming 3.8 or 3.9 percent but also we have to keep in mind that next year we have a very large Rs 2,25,000 crore of redemptions increasing the gross supply substantially. What we are seeing today is that if that gross supply comes at the longer end of the curve then we could see significant curve steepening happening which we have already seen over the last few months. This steepening of the yield curve at a time when growth is already facing headwinds could in fact become counterproductive.Q: What is your sense about inflation, there is the pay commission impulses, there is also the likelihood of fiscal deficit going higher. Do you think if fiscal space is taken is there monetary space at all, rate cuts possible?Mohan: 2015 was very unusual for the global economy as a whole in terms of a very steep fall in oil prices and also in all other commodity prices. The current expectation in the global economy as far as I can understand are that these commodity prices and oil prices might still fall further but nowhere near the pace of 2015. So, in that sense the reduction that the expectation of inflation coming down very much in the coming year are probably not very high.Second point I would make as a conceptual issue that is I think arising for most monetary policy makers in the world is that as a consequence of the commodity price fall and the oil price fall, the prices of goods in the world have really come down. So, it is not just in India that there is a large wedge between the producer price index and the CPI, in many parts of the world indeed including United States there is a different of 4-5 percent between the two. So, I do feel that central banks all around the world including ours will have to increasingly face what to do with inflation targeting when there is such a large wedge between the producer price index and the consumer price index whose inflation expectations are we working on when we look at this. Second, if the CPI continues to be much higher than PPI around the world including in India and the inflation targeting is essentially focused on CPI, it really does mean that the real interest rate producers, goods producers are much higher as opposed to service producers. So, that will indeed have a dampening effect on investment and growth around the world including in our country.Q: What are you expecting by way of rate cuts?Chakraborty: Our sense is that we could get maximum one or two rate cuts in 2016 primarily because we expect that at least in the first half of 2016 commodity prices to stay low. That would probably be a situation where Reserve Bank of India (RBI) could under shoot the 5.8 percent March 2016 inflation forecast and if that happens along with a somewhat tighter Budget in February then that opens up some scope for monetary easing. Having said that we are worried of four event risks on inflation in 2016, one is arising out of HRA component of the pay commission, second is from the adverse el-nino effect which is still continuing. Third is from a possible hike in tax rates to manage the fiscal and fourth is purely from the base effect of commodity price declines in 2015 running away in 2016. These are the things that we will watching from an inflation risk perspective. Q: Do you think that the banking system will be any better able to pass on the rate cuts considering the amount they will have to provide for bad loans?Bhoumik: It will be a challenge. P&L is expected to be under pressure not just next year but in the foreseeable future. The changes that have been happening in the recent years in terms of banks having greater flexibility to raise longer tenure bonds and thereby reducing their refinancing risk and then the recent guidelines of RBI on the marginal cost of lending, I think these should improve the transmission ability. Historically I think banks had passed on anywhere from 30-40 percent during a reduction cycle, that could increase now 60-70 percent. So, I think their maneuverability has improved, whether they want to wish to do that for survival reasons is another question.Q: Actually Samiran Chakraborty kicked off the conversation itself by saying that one of the problems to growth will be deleveraging Corporate India and to some extent de-bottlenecking the balance sheets of banks. What is your sense the Reserve Bank’s financial stability report very clearly indicated there is a huge problem of leverage with at least 100 top corporate and that is blocking at least 15-20 banks from doing any lending. What is you sense, will corporate India be any better and thereby give banks some chance to improve their balance sheets?Bhoumik: The good news is that currently the working capital expansion is halted. That is because commodity cycles are fallen and so therefore your inventory amounts have reduced and so therefore the requirement for working capital debt has actually fallen so therefore the leverage build up has sort of plateaued out. Having said that the stickiness of EBITDA cash flow generation to be able to service debt that is going to remain a problem. I think the corporate issue the stickiness of distressed assets would remain. Would that mean that it would clog our banks lending capacity for sure? These are also relatively higher risk weighted assets and so therefore banks would be extremely reluctant to extent themselves further to corporate lending. Could that be a party popper as far as GDP growth is concerned. Well the argument is that other entities non-banks would sort of step in. Markets have been very accommodative; equity markets have been very supportive. Funding could be a challenge. We need to figure out how that mechanism works through. However, for all practical purpose we are seeing a fall of the PSU banks market share from current 70 percent to anywhere 50-60 percent over the next five years. Q: What about the state of the banking system itself? The Reserve Bank financial stability report again expects just the gross non-performing assets (GNPA) which is only part of the stressed assets to go to 5.4 percent in March from the September level of 5.1 percent of the total book. Stressed assets of course will go up at least commensurate probably to 12 percent. What is your sense will FY17 see any relief in terms of stressed assets. Will they be at least lower in terms of a percentage of the book?Bhoumik: I think the increments are coming down. There has been some cyclical pick up construction equipment some of the freight movements are picking up and to that extent there is more cash with the borrowers. On the cyclical side there could be some relief. In sectors such as iron and steel where commodity cycle is expected to remain weak in some pockets of infrastructure other than roads because roads again some of the engineering, procurement, construction (EPCs) are coming in so therefore there is more cash. So, other than roads or some of the other infrastructure sectors I think the problem of over leverage would remain. Could it mean lower credit cost I doubt. I think the incremental assets that banks are pumping out on the retail side should hold. However, on the corporate side the challenge is that, we feel the banks are under provided. So, while from an accounting side there could be some relief but it would only be temporary because end of the day in couple of years those provisions would need to be taken. So, we don’t see any relief on the credit cost side at all. Q: There are two institutions that may crop up in 2016 and before we run out of time I want your comment on that. Do you see the Monetary Policy Committee (MPC) coming into being and that dramatically changing the way in which monetary policy will be conducted?Mohan: I don’t think that the coming into being of MPC or not would make that much difference to the outcome of monetary policy in the coming year or later. We have good enough experience of monetary policy committees around the world. Certainly the UK, ECB, United States and other countries that the MPC have not really behaved very differently from what the governors would like and of course is done my persuasion rather than any force of course. So, I don’t see much difference in monetary policy making as a consequence of the MPC. Q: Do you expect public debt agency to come up, the independent debt office to come up and will that be a source of instability in the markets in 2016?Mohan: I remain skeptic of setting up independent debt management agency. To my mind saying that there would be a debt management agency that is independent does not make any sense. I don’t know anywhere in the world where the debt management agency independent because a key sovereign function is issuance of debt so how can there be any independent debt management agency. I continue to believe that this is a so called reform that is misinformed and I would still say it should not be done even though I suppose there is now agreement that it will be done.