Slow pick-up in growth in H2FY13; RBI easing unlikely: HSBC

Putting the onus for the dismal show of the Indian economy on administrative obstacles and policy paralysis, HSBC came out with a report last week labelling the nation as a ‘gasping elephant’.

India's economic growth plunging to a nine-year low drew sharp reactions from HSBC while Credit Suisse said latest numbers will send ‘shivers down’ the spines of coalition politicians of the ruling UPA.
India's economic growth rate slowed in the fourth quarter at 5.3% and 6.5% for 2011-12. The decline in growth was witnessed in almost all segments of the economy, including agriculture, manufacturing, mining and construction. At 6.5%, the GDP growth in 2011-12 has been at a lower level than during the crisis period growth of 6.7%, it said.
However, in an interview to CNBC-TV18, Leif Eskesen of HSBC Global Research says if one looks at the sequential growth rate between the fourth and third quarter of the fiscal, there was actually a pick up in sequential growth in India from 0.9% in the October-December quarter to 1.9% in the final quarter of the fiscal. So, GDP growth actually picked up momentum in Q4, he says.
Eskesen sees India’s GDP growing gradually in the second half of this fiscal. However, since the drop in growth is due to structural issues, he wants the government to now focus on the supply side. “Supply side reforms are the need of the hour,” he says. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: India is the gasping elephant according to you for Q4. How much have you scaled down targets and expectations for FY13 now?
A: We are still in the process of looking for the latest stream of data before we pin down the new number, but relative to the previous forecast of 7.5% we have for the fiscal that has clearly downside risk. We are still in the process of finalising. It’s important to keep a couple of things in mind. The final quarter of the fiscal was weaker than expected in annual terms.
But if you look at it in seasonally adjusted terms, so if you have a look at the sequential growth rate between the fourth and third quarter of the fiscal there was actually a pick up in sequential growth in India from 0.9% in the October-December quarter to 1.9% in the final quarter of the fiscal. From the perspective of momentum, GDP growth has actually picked up in the final quarter and not a lot of people seemed to have picked up on that. Q: How would you split up the next year in terms of quarters? What kind of trend are you going to see? Do you expect the first two quarters to be softer and then a pick up or do you think this minor sequential improvement that you are talking about will come to full force in Q1 and Q2?
A: The third quarter of fiscal was quite bleak, so there is a little bit of a rebound there. So in sequential terms, we are probably going to see a bit of moderation now in the first quarter of the fiscal, quite moderate pace of sequential growth in the second quarter of the fiscal and then only a gradual pick-up in momentum in the third and fourth quarter of the fiscal.
That would also translate into a pattern when it comes to the annual growth rate that’s quite lackluster growth in next couple of quarters. Then only in the second half of the fiscal, is there scope for a pick up in growth there on the back of hopefully, a gradual stabilisation of global economic conditions, but also hopefully some more traction on the domestic side in India when it comes to supply side policies.
This is not just because those policies are important from a medium-term growth perspective but also because they are important from the perspective of investor sentiments in the short-term which could also of course boost growth. There is a little bit of room for monetary policy, not too much. I don’t expect a lot of impetus to growth from that front. Q: By little bit of room, do you mean we could see a rate cut this time because of the slowdown and then a stall later or do you think that may not come this time as well?
A: Certainly the weak growth number we had out for the final quarter has added to pressures on the RBI to cut. You can say that a somewhat weaker growth outlook by itself hardly as a consequence of a weaker final quarter number, but also because now you have more external headwinds and also because the likelihood of progress domestically in India on supply side reforms to some extent creates a little bit of room for monetary policy easing.
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But I have to say the room is relatively small still, because as we see it anyway, the slowdown in growth in India is also in many ways structural in nature. India’s potential growth rate has actually declined because of the lack of supply side reforms and also because of the negative impact the policy paralysis has had on investments in productive capacity.
So you can’t really use monetary policy to stimulate growth too much, because you very quickly start to see inflation pressures build up again. That’s an important distinction to make that this is a structural slowdown. It’s a slowdown that is driven by supply side factors becoming more binding and you don’t ease up the supply side of the economy by easing demand side policies. We really need to focus on supply side policies. Q: Do you think our economy has now entered into a pronounced state of stagflation with high inflation and slow growth? If you had to put a timeline to this, how many more months if not years do you think our market will have to live with such slow growth?
A: Certainly, this current fiscal and I would also say the next fiscal, India is going to deliver growth rates that are below what it was accustomed to before the global financial crisis. In that sense sub-par growth is what I would expect for the next couple of fiscal years and also inflation staying elevated. In both cases it goes back to the fact that the slowdown is structural in nature. That is what in a sense makes the slowdown more persistent in the absence of more traction on supply side reform.
In addition to that the elevated level of inflation is also because of lack of supply side reform more structural in nature now. That’s also why inflation will stay persistent over the next couple of years. What really needs to come to the fore before we have an improvement in inflation-growth tradeoff in India that they get cracking on supply side reforms, that we have more traction on that side. We should start to see a little more expeditious measures to address these constraints. Q: So you are not in the camp that believes with the current cool off in commodity prices there will likely be much more relief on the inflation tick in the second half? What is it that you are penciling in on the inflation trajectory now?
A: We haven’t really changed it much. It’s true that commodity prices have come off, but the exchange rate has also depreciated at the same time. So net-net I wouldn’t say necessarily say there is much of a difference on that front. A big portion of the inflation problem is structural in nature which also will keep it quite persistent. We also have adjustment to indirect taxes embedded in the Budget that would add to headline inflation.
We will also hopefully get adjustment in diesel and kerosene prices to contain the fiscal deficit that would add to headline inflation. As we see it, WPI inflation is still going to come in at around 7% by the end of this fiscal and only gradually come off in the following year thereafter. Assuming we have some progress on supply side reforms, that can improve that growth-inflation tradeoff. Q: Those PMI numbers that have been coming through since yesterday have looked quite weak especially for the euro zone. What’s HSBC baking in, in terms of expectations of either some kind of liquidity relief from the ECB or even a leaning towards QE from the Fed?
A: The global economic backdrop has weakened considerably and there are more pressures on policymakers now to step up to the plate and deliver more. The ECB specifically this week we are not expecting any announcements yet as far as additional policy measures, but of course pressures are growing on them that they may have to step it up.
There is a possibility of course that further down the road they may have to resort to additional liquidity measures, that they may have to step into government bond markets. It depends on how much the situation worsens over the next couple of months.
When it comes to the Fed, it also looks like now the slowdown in growth is coming through the momentum we had earlier in the year starting to fizzle out to some extent. For the US for example, we are expecting just 1.7% growth this year, 1.8% next year below consensus and below the assumptions the Fed operates with.
On that backdrop, we still see it as likely we could get a new Operation Twist. Potentially, if things worsen even further, we could get another round of quantitative easing. It’s not given, but it’s certainly possible given the outlook we have right now.