See growth falling in Q2 FY14 as well: HSBC

The macroeconomic uncertainty in India is at a very high level and is making consumers and businesses far too cautious about their spending, says Leif Eskesen, chief economist, HSBC.

Speaking to CNBC-TV18, Eskesen says the recent steps taken by the RBI to tighten domestic liquidity will lead to an increase in the funding cost and the probability of a slowdown in growth.

This macro uncertainty apart, Fed tapering will decelerate growth further in Q2 FY14. HSBC lowering India's growth forecast from 5.5 percent to 4 percent is a testimony to its negative perception on the country's growth prospects.

Eskensen’s views come on a day when India's factory output has fallen for the first time in 4-and-a-half-years. The HSBC Manufacturing PMI sank to 48.5 in August from 50.1 in July, the lowest reading since March 2009.

Below is the edited transcript of Eskesen’s interview to CNCB-TV18.

Q: Factory output at 48.5 percent, we haven’t seen the Indian manufacturing go below that sub-50 percent mark since March of 2009, what is your sense in the coming few months, is it going to remain in this below 50 percent mark?

A: I think so. Right now, what the economists are going through is a bit of a downturn. The recent steps that have been taken by RBI, for example to tighten domestic liquidity is something that has led to an increase in the funding cost, expectations of higher lending cost, and of course it has also increased the probability of a slowdown in growth. So that is a hole in bank, consumption, investment and economy.

The macroeconomic uncertainty in India now is at a higher level. That is another factor that has bearing on consumers and businesses making them more cautious about the spending. We don’t expect RBI to be able to rollback some of these tightening measures any time soon. If anything, they may have to tighten further.

Secondly, is it is going to be a while before we have more clarity on the external side in terms of what are the implications of Fed tapering and that would also continue to add to pressures on the currency. There is also the macro uncertainty that prevails in India and that continue to linger for the next couple of months. That would continue to essentially weigh on growth. So, I think we are coming in for a second quarter of this fiscal year where growth is going to decelerate even further.

Q: Importantly as you said, things will get worse from here, so what is your worse case scenario that you are plugging in at this point of time?

A: I will talk about my best line scenario first. Today we released our revised forecast for this fiscal year for GDP. We are now looking for 4 percent growth. From 5.5 percent it is a fairly significant downward revision.

That implies that growth in the second and third quarter this fiscal would slip below 4 percent and then we would only recover to around 4 percent in the final quarter of this fiscal.

It is going to be a while before we start to see the effects of the structural reforms that have been announced beginning to kick-in. It is going to be a while before that investment project that have been expedite through the CCI start to break ground probably not until the end of Q4 this fiscal.

At that time, we could also start to see some of the macrouncertainty gradually recede and in that sense, confidence will recover. But it is going to be a slow recovery at that point onwards and there still are downside risks to the outlook related to the possibility that macrouncertainty can persist for longer, that is also a possibility that politics can get in the way or should we say more meaningful progress in structural reforms.

Q: What is very disappointing is that exports have degrown this time around breaking the sequence of about 11 months of consecutive growth and even that is not something which you would expect given that rupee has depreciated?

A: That is true. They can bounce around a little bit from months to months but it is testament to the fact that the global economic backdrop is still not particularly strong. The data out of the US in a sense is rather mixed and in Europe we are seeing progress on that front some stabilisation but overall economic activity in the euro zone is still quite weak. We look at emerging markets and the growth conditions are there are softening if anything. So, the global backdrop is not very conducive at the moment for any sort of sustained pick up in export growth.