See downside risks to Q1 GDP target of 6%: StanChart

Samiran Chakrabarty, Head of Research, Standard Chartered Bank says the 6 percent Gross Domestic Prodcut (GDP) growth for the April-June quarter projected by the bank could have some downside risks post the June IIP numbers. He believes the big jump in the April to June number is based on one-off factors and might not be repeated in next quarters of the year.The bank is not far from the consensus estimate of the FY15 GDP at around 5.3 percent, and FY16 GDP around 5.8-6 percent.He believes the fuel subsidy for the current fiscal could be lower than the estimated Rs 65,000 crore, if oil prices remains below USD 100 per barrel because the Budgeted subsidy on oil is based on oil at USD 110/bbl and exchange rate at 60/USD. So lower crude oil prices would reduce India’s fiscal deficit, says ChakrabartyHowever, he does not see too much of an upside surprise in the fuel subsidy from LPG and Kereosene because according to him the government would wait for the Expenditure Reforms Commission suggestion in December before implementing anything on cooking gas or kerosene.

Below is the transcript of Samiran Chakrabarty's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.Sonia: I am sure a lot of economists must have heaved a sigh of relief after looking at the way crude prices have fallen because now that will help rein in fiscal deficit, what is your estimate of how much relief one could get because of that and what your prognosis is for fiscal deficit by the end of FY15?A: For a country like India, which is a large importer of oil, any drop in oil prices is good news. Having said that you have to be comfortable in forecasting this decline to stay on for a long period of time.The second thing that we have to keep in mind is that this decline in oil price is primarily because of different agencies changing their outlook on global growth, and with global growth outlook declining, there is a possibility that India’s export growth might suffer as well. So, we have to keep that balance in our mind.On the fiscal side, I think it is quite possible that if oil prices stay below USD 100 per barrel then the actual fuel subsidy that is there in the Budget of about Rs 65,000 crore, the subsidy could be lower than that number.In fact, the Budgeted number is based on USD 110 per barrel oil price and 60 per dollar exchange rate. So if we are around that 60 per dollar mark on the exchange rate and about USD 10 per barrel lower on oil prices, then that means that the fuel subsidy in the fiscal could be lower than estimated.

Anuj: Added to that, we still have not taken into account any kind of incremental reforms for example on kerosene and liquefied petroleum gas (LPG), if that was to take place, how much more do you think it can trim the numbers down?A: If you look at last year of about Rs 1,40,000 crore of total under-recoveries on oil, about Rs 45,000 crore was from LPG only. So it is a very large component and if the government suggests a gradual increase in LPG prices then this will reduce that subsidy amount as well but our sense is that now since this Expenditure Reforms Commission is in place and is expected to give their results by December end, probably the government will wait for the expenditure reforms commission suggestions before implementing anything on cooking gas or kerosene. For at least FY15, LPG and kerosene might not give you too much of an upside surprise on fuel subsidy.Sonia: In terms of numbers how much do you think the government could save on the oil import bill at this point in time given that brent crude has fallen from USD 115 per barrel all the way to USD 102 per barrel?A: Our estimate is that a dollar per barrel decline in price is about a billion dollar improvement in the current account deficit (CAD) number. The estimate on the fiscal deficit side is slightly more difficult to make because it will depend upon how much price cut is passed on through petrol and diesel. But everything else remaining equal one dollar per barrel, could give you about Rs 4,000 crore of savings on subsidy as well.Anuj: Standard Chartered has one of the most aggressive estimates for gross domestic product (GDP) growth, what do you think is the upside risk to your numbers over the next two years?A: Our view - the strong GDP growth assumption that we have made is primarily for the April to June quarter and that too was made before the last print of index of industrial production (IIP). So after the last print of IIP, the 6 percent April to June number that we are projecting that has little bit of a downside risk. Overall, for fiscal year 2015 and 2016, I don’t think we are too off from the street in terms of our growth forecast looking at around 5.3 percent growth for fiscal year 2015 and possibly going up to about 5.8-6 percent for FY16.I think the broad point to take is that the government, we expect, will take some incremental steps in reforming, which will bring in more capital helping the growth process but at the same time, the significant leverage in the system would mean that the recovery will be gradual. So we are torn between the two, and that is why expect somewhat of a gradual recovery only. The big jump in the April-June number, our sense is, mostly driven by one-off factors might not be repeated in the next quarters of the year.for the entire interview watch video