Chetan Ahya, Co-Head of Global Economics & Chief Asia Economist, Morgan Stanley said the house is expecting the second quarter (Q2) GDP number which will be announced on Thursday to be around 6.5 percent, which will confirm a turn in the growth environment that will be reported in September quarter and that trend is expected to continue.
The moderation seen in the data points in October could be a temporary downtick, while the underlying fundamentals of the economy are good enough to bring recovery back again, said Ahya.
According to him, in FY19, all the drivers of growth would be in place – with pick up in consumption, exports to be held back at reasonable level, global growth to be stronger and missing link of capex will also pick up going forward from 7 percent of GDP right now to 8.5 percent by March FY20. “So the private capex joining in will bring the strength in India growth numbers that we are forecasting for it to go to 7.5 percent in March FY19,” he added.
When asked about their expectation from the Reserve Bank of India monetary policy next month, he said they expect them to maintain a neutral stance by highlighting upside risks building from higher oil.
He also does not expect the fiscal deficit target to be breached beyond 3.3-3.4 percent, but more likely to be around 3.2-3.3 percent because the house is quite constructive on growth outlook, which is evident in September quarter.
The in-house trajectory on yields is that it will be around 7 percent, and don't see further rise in them, said Ahya.
Giving a trajectory for the INR going forward, he said it is broadly driven by dollar and that on a trade-weighted basis dollar will be sideways and so emerging market currencies with high real rates like India will see some appreciation. So, expect moderate appreciation in INR versus the dollar, he said.
In the interview, he also explains the reason for downtick in export numbers in October. However, he expects exports to recover to 8-10 percent average dollar-value growth from very low number in October month.
Below is the verbatim transcript of the interview.
Latha: We are getting the big gross domestic product (GDP) number in about three days. The last set of numbers we had in October has not been very good as your report points out. Purchasing Managers' Index (PMI) was a little under the weather, auto sales were not too good and exports were quite a disaster, so how should be prepare for this number though this is of September quarter?
A: The August-September numbers were good if you looked at autos. You mentioned PMI, PMI is also looking good in September so broadly we are expecting 6.5 percent GDP growth and this will be a confirmation of the turn in the growth environment that is going to be reported in September quarter. But we do expect that trend to continue going forward too. We think that the moderation that you saw and a lot of the data points in October was a bit of a temporary downtick. And the underlying fundamentals in the economy are good enough to bring that recovery back up again.
Surabhi: I was looking at your projections. For 2017 it is 6.4 percent, next year 7.5 percent and then going up to 7.7 percent. What will be the growth kicker to get us to these numbers? Which particular sector? Where do you see the recovery gathering pace?
A: Essentially what we are seeing is that in 2018 calendar year or FY19, you will have all the drivers of growth in place. We would have seen further pick up in consumption. We expect exports to be held back at a reasonable level. We are expecting global growth to be strong so that gives us the confidence that export numbers will also be reasonable.
The link which has been missing so far is the capex part and we are expecting private capex to pick up going forward from around 7 percent of GDP right now to about 8.5 percent by Financial Year, March, 2020. So the private capex line also joining in will bring that strength in India growth numbers that we are forecasting for it to go to about 7.5 percent in March, 2019 Financial Year.
Latha: Let me revisit that export number although that is of October and not September. September was good. Have you dissected why we did so badly? Generally, from January to October, we have not really participated in the global growth story except for the month of September. Have you analysed what is going wrong and are you satisfied that this quarter those blues will be behind us?
A: There are two reasons. One is that actually all the countries in the region did show deceleration in the month of October and I like to look at Korea numbers because they tend to be cleaner when you are analysing the global trade numbers in the region and Korea's export growth also dipped in the month of October. Of course, India has dipped a bit more and that is probably because of the second reason that we still have that overhang of GST implementation and its impact on the small and medium enterprises (SME) exports. Having said that, the government has taken the measures on reversing that problem that was there for SMEs and at the same time, when we look at the early indication for the month of November, Korea is quite good in declaring numbers. They have also shown the first 20 days of the month of November export trend. That is already beginning to pick up. So we are expecting exports to recover back to about 8-10 percent average dollar-value growth from that very low number that you saw in the month of October.
Latha: Let me then come to the inflation trajectory and what you are expecting from the monetary policy. Are we going to stick with the 7 percent or do you think that there can be substantial hawkishness in the Monetary Policy Committee (MPC) report on Wednesday next because of crude and metal prices globally?
A: We think they will maintain that neutral stance. I think the last meeting sounded like it is hawkish because the market's expectations was that of it to be too dovish, I would say. I think the language was relatively neutral and even in fact after the monetary policy, put the title of our report as 'Firmly Neutral'. That is what it will be. It will still be firmly neutral. They will highlight risks on the fact that there is upside risk building up from higher oil, but we think the monetary policy statement will still be relatively neutral.
Surabhi: Of course on Friday, we were anticipating Standard and Poor's (S&P) next move and finally got to know that it is a pause from them. They are not as heartened as Moody's with respect to sovereign ratings here and the big flag from S&P's point of view continues to be the twin deficit issue. How do you view the current state of the fiscal here given than GST revenues are still lumpy, we are trying to understand how the collections are looking?
A: What has happened in the last few months is that there has been a slippage in the deficit numbers and its 12-month trailing number for the central government is tracking at 3.6 percent. When we analyse the breakup of that into expenditure and revenues, it does look like it is more related to revenue rather than expenditure.
So the run rate of expenditure year-to-date is very similar to what you would have seen in the previous years but the revenue is much lower than what we had seen in the previous years by this time and that is because of the GST implementation and the fact that the trailing numbers for growth, particularly nominal GDP growth had not been great. Having said that, going forward, we do see a turn in both, nominal GDP growth as well as corporate income tax revenue and so, we think that broadly the government should be able to achieve that deficit target of 3.2 percent, might be a small slippage, but not a lot. So I think they are on track of that fiscal consolidation path. It is the year ahead where we are sceptical that they will be able to follow the glide path because that will be the last financial year before general elections.
Latha: That is what a lot of economists are worrying about, the next year and therefore, if you want to show a lower fiscal deficit for next year then this year, you have to show may be 3.5 percent. That is one of the arguments the market is working with. Do you expect they are going to borrow something in that January and February, five weeks where they have kept only Rs 5,000 crore of borrowing as against Rs 15,000 crore per week in the previous weeks?
A: As I mentioned, I do not think they will breach the deficit target from much more than 3.2. So it will be more like 3.3, at worse 3.4 percent, but l think more likely 3.2-3.3 percent. So I am personally not expecting a much big breach in the borrowing target and the reason is because we are, as I mentioned earlier, quite constructive on growth outlook and things have turned around.
We already have the evidence in the September quarter and I am sure you will get the numbers in the next few months which will bring that better nominal GDP growth and tax revenue for the government. So that is what will basically ensure and the government, to be fair has also been highlighting the same issue that it is the revenue line where there is uncertainty and therefore, the borrowing programme.
Latha: So what are you expecting by way of direct tax revenue. I mean indirect tax now is in a state of flux, but how do you expect tax revenues to shape up? We should get those numbers also on November 30.
A: I do not have the immediate monthly numbers forecast, but broadly, the framework we are approaching is that one is the GST compliance will improve and second is that the overall nominal corporate revenue growth will improve.
Latha: What is the in-house view on where yields will go? Are you expecting 7 to more or less hold in the next quarter or do you think we could go higher if there is a borrowing or two?
A: We are of the view that we will hold at that 7 percent range. We do not expect further big rise in yields. It is already sort of the move that has needed to happen have already happened.
Surabhi: The outlook for the currency, rupee?
A: The market is now getting concerned about a potential rate hike. If I were to go into the bond market pricing, in the international market, in Overnight Index Swaps (OIS), it is concerned about a rate hike. We do not expect a rate hike in the next 6-7 months. We have a rate hike but that is in the fourth quarter of 2018.
Surabhi: Do leave us with an outlook on the currency as well. What sort of a band do you expect the rupee to be in?
A: Broadly, it is driven by our view on the dollar. We think the dollar will largely be on a trade weighted basis, sideways and emerging market currencies with high real rates like India will see some appreciation. So you should see moderate appreciation in INR versus the dollar.
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