Don't expect a big recovery in Q4 GDP, says CLSA's Malik

Moneycontrol Bureau

Rajeev Malik, senior economist at CLSA, does not expect a meaningful improvement in GDP growth in the March quarter.
"The March quarter which is not going to be dramatically different from what it was in December although it will be slightly better," he said in an interview to CNBC-TV18.
"Bear in mind headline number in December was impacted by what happened to agriculture. So that is going to play a bit of a swing effect. But it is important to bear in mind that India is in for a relatively long ride  and that we are treading the bottom, dramatic improvement is not going to be there. The only solace perhaps is that incrementally things would be somewhat better but nothing off to the races at all," he said.
As India is becoming a high inflation, low growth economy, Mallik says a weaker rupee should be part of the solution and not part of the problem.
India's current account deficit (CAD), which is the difference between inflow and outflow of foreign funds, widened to a historic high of 6.7 percent of GDP in December quarter to USD 32 billion on account of a surge in oil and gold imports, besides weak exports. It was at USD 20 billion (4.4 percent of GDP) in the corresponding quarter of last fiscal. Also Read: When CAD is bad, govt should let the rupee drop to 60
According to Malik, the fourth quarter CAD number will be significantly lower on recently announced gold import duty hike. However, for FY14, he expects 1) CAD to remain elevated and 2) rupee to continue to depreciate.
Large CADs are typically, not always, are symptomatic of strong economic growth. But that is not the case in India, which is why Malik feels, it is quite idiosyncratic. "I don't think a large CAD is going to have that big an impact in terms of how RBI thinks about its interest rate polices and frankly it shouldn't," he told CNBC-TV18 in an interview.
CLSA expects the Indian rupee to touch 57-58 against the dollar by the end of this year and break above 60 in first half of FY14. Below is the edited transcript of his interview to CNBC-TV18. Q: Where do the current account deficit (CAD) numbers leave the rupee over the next few months even if there is some recovery in the CAD in the fourth quarter?
A: Our outlook remains unchanged as far as dollar-rupee is concerned. I would still emphasis 57-58 levels for the rupee later in the year. The government is more focused in turning on the tap as far as Foreign Institutional Investor (FII) inflows are concerned. So we might see some action there.
However, giving pain killers to a very sick person is not a substitute for actual remedy. The fact is that India has become a high-inflation low-growth economy, among other things a weaker rupee should be part of the solution, not part of the problem. Q: Many people say that Q4 will be dramatically different and much better. Do you think the CAD figure has ramifications for how the Reserve Bank of India (RBI) may choose to move now?
A: I think Q4 or the March quarter number will be significantly lower. Due to increase in gold import duty, gold played a critical role in driving December quarter CAD. This trend will reverse going forward. I expect CAD for whole of FY14 to be lower, it would still be elevated and the rupee will depreciation due to events happening on the capital account front.
How will the RBI look at it? It is important to note that large CADs are typically symptomatic of strong economic growth that is not the case in India, so it is somewhat idiosyncratic. I don't think large CAD will have a big impact on how the RBI thinks about its interest rate policies and I think it shouldn’t. Q: Are you expecting dramatic recovery in gross domestic product (GDP) numbers and sentiment in Q1 and Q2?
A: Certainly not. The March quarter will not be dramatically different from December quarter although it will be slightly better. The headline number in December was impacted by agriculture. So that will have a swing effect. It is important to note that India is in for a relatively long ride that we are treading the bottom; dramatic improvement will not be there. Incrementally, things would be better but nothing off to the races at all. Q: Do you expect it to get worse for some consumption sectors? That was the main say of India’s economy and on that there has been sore disappointment. It started with the autos and is visible in other sectors like cement as well?
A: Many analysts have penciled in at least incremental improvement on the investment front. So if the government does not come through even with marginal improvement then there is potential downside.
I am less perturbed on the consumption side. If one looks at the Budget profile, I wouldn't be surprised by the middle of the year the spending cycle as far as government is concerned starts off again. Essentially, what the Budget has done is whatever spending cuts were announced last year for FY13, have come back in FY14 conveniently well timed ahead of the general election.
So, from middle of this year onwards lot of concerns that people are expressing about slowdown in government consumption will become a history. There will be other headwinds as far as consumption is concerned, like to what extent subsidy bill rolled back etc. Consumption should weaken in India for growth to come and also for recalibration towards investment. That is just in a way the rite of passage that the economy has to go through. And the longer the government delays it, much slower and more protracted the recovery will be.
_PAGEBREAK_ Q: How do you see the global backdrop for the rest of 2013? Do you expect that to remain supportive because some of the recent data points from the US have been quite good? Do you think 2013 is a story where India improves marginally but also get a bit of a tailwind from generally the global economic cycle?
A: As the year progresses, increasingly people will focus more on how the global growth environment is improving and related to that there will be concerns about as and when the liquidity tap either gets tightened or begins to reverse. Begin to get reversed is a much longer drawn-out affair but markets will price it much earlier.
I think in the last five years people have forgotten that India as a story or as a market, does exceptionally well when we are not spoiling things ourselves, it does well when global growth is poor or subdued and global liquidity is exceptionally easy and as the year progresses, the big theme for 2014 will be, better global-growth outlook and less-comfortable liquidity backdrop.  
So export-driven Asian economies, will do lot better. India doesn't necessarily stack up in that area while it has some structural angles. We have not used the downtime to fix our imbalances in a dramatic manner. The size of CAD and the way it has been financed is really scary because any kind of global reversal or slowdown can have a dramatic amplified impact on the rupee and on flows into India. Q: I am just looking at your targets for the currency, between 57 to 58 by the end of this year and 60 by the time we get to calendar year 2014. Is that the trend you think it is going to take for the rupee, steady depreciation because in the past we have fallen and then had sharp pullbacks and I ask because this is extremely important for whether or not people choose to put in more money into this market?
A: I think volatility will be the name of the game and I don't think anybody can forecast point currencies on a month-to-month basis. However, it is important to take a step back and see how the cross currents for the rupee are developing; I think people go back and think about the 2002 to 2007 scenario.
I think the rupee is incrementally moving back to the pre-2002 situation, where annual depreciation would have to come about. Only two factors can prevent it, first a dramatic reform agenda which pushes up growth or a dramatic decline as far as inflation is concerned, or possibly a third angle that is once again slim as far as global growth is concerned, is fresh wave of liquidity injection.
However, rupee appreciation that a lot of people think is not a sustainable game plan over the medium term even if the government continues to attract foreign flows simply because India runs a much higher inflation compared to its trading partner.