Recovery in India needs to be investment-led: HSBC

He is not too hopeful about growth outlook for the next couple of quarters. He says headwinds on structural constraints still exist – whether it is infrastructural bottlenecks or economic reforms to liberalise the economy. According to him, issues with corporate leverage and asset quality deterioration of banks too will have an impact on economic recovery. Apart from that, inflation continues to be on the higher side, thereby requiring macroeconomic policies to be tight, he adds, which in turn suggests that growth may remain below 5 percent.

On the Ukraine crisis, he believes it has to linger, gold prices have to remain high for sometime for it to impact Indian or other EM currencies.

Below is the verbatim transcript of Leif Eskesen's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: We haven't got your reaction to the gross domestic product (GDP) numbers that came last week? Your overall take on the Indian economy now and the kind of newsflow that is got over the last ten days or so?

A: On India what we saw was in line with expectations. The GDP numbers that came out last Friday showed slight deceleration. I think if we go below the surface, there were some surprises on the supply side. In fact it was in line with expectation but I think agriculture was a bit weaker than expected. In some sense, services were a bit stronger than expected. I would have expected a little more of a pullback from government’s spending compression on services than what we saw. So there was a positive surprise there.

On the demand side, you can see that the weakness still resides when it comes to private consumption, it resides in investment space as well. So of course the latter I think is in particular a bit concerning from a forward looking perspective because it ultimately has to bring about a recovery in India, it has to be an investment led recovery. That is the only way you can get traction on growth without seeing inflation building up again essentially. So that is the key thing that of course needs to happen going forward.

As far as outlook for growth in the next couple of quarters goes, I am not very hopeful that we are going to get much of a recovery on that front, there still are some headwinds at the moment. That is number one. Structural constraints are still in place, it will take a while before they lift these whether it is infrastructure part or whether it is getting traction on economic reforms to liberalise the economy, develop the financial sector. So that would take a while before they lift. You still have issues with corporate leverage to some extent. Also the banking sector is going through a process of - we are seeing an asset quality deteriorate. That is also something that constrains any recovery and then we also have in some sense still imbalances in the economy in terms of high inflation, a current account deficit (CAD) scenario but it is still on a bit of a higher side. So that means the macroeconomic policies and monetary fiscal policy has to remain quite tight. So that suggests that we are probably going to see growth remain below 5 percent probably also in the upcoming quarter. The quarter we are currently in and we have to be a lot deeper into the current upcoming fiscal year before we start to see more notable pick up in growth.

Ekta: I wanted to touch upon the HSBC PMI data, which was the manufacturing data that came out yesterday. It is expanded to 52.5 in February versus 51.4 on a month-on-month basis, but it is completely contrary to what the core sector growth was indicating for the month of January which was a growth of 1.6 percent taken that this is for February but nonetheless the trends in index of industrial production (IIP) as well as the core sector have been different from what the HSBC manufacturing PMI at least has been throwing up, could you explain to us what the trends are and what the survey was indicating for HSBC PMI in particular?

A: One thing we have to remember is that the PMI survey essentially talks about the sequential momentum. So it looks at what its activity indicating month to month essentially. That reflects essentially. That is one thing. The composite PMI is an indication of changes in output over one month but also orders as well as what is happening to inventories etc. So it is more of a composite measure in some sense of economic activity so you cannot compare them in that sense. Then there is also a composition of difference in some ways but overall what the PMI shows is that there are certainly signs of stabilization at the moment. Some of that is driven by external demand picking up to some extent maybe also some stabilization in domestic conditions. On that front, you can say since where we were in August where global financial conditions were quite high, that has transmitted into domestic financial conditions in India and things have certainly improved since then. I think that to some extent could have helped some of the pockets we have seen on monetary policy side in terms of how to anchor monetary policy moving, that is the right direction has also to some extent been important for inflation expectations potentially and that could also to some extent have helped but we are talking about stabilization, we are not talking about a swift recovery.