Economic Growth
Q1: The Mid-year
analysis of the CEA, lowered economic growth projections sharply
from 8.1-8.5 per cent for 2015-16. Don't you think it is too
pessimistic a projection since the UPA had left
growth at 7.9 per cent for 2013-14? Even upper band
is a tad higher than 7.3 per cent recorded last year.
A1: At the end of
2014-15, most macro-forecasters(public & private) had predicted a GDP
growth rate of over 8% for 2015-16 with a steady growth in the first half and a
stronger pick up in the second half of the year. Since then they have reduced their forecasts
of GDP growth in 2015-16 to below 7.5%.
I retain my post-budget forecast of a 0.25% to 0.75% acceleration in GDP
growth in 2015-16 over previous year. Given that GDP growth rate was 7.3% in
2014-15, my expectation remains of a growth rate between 7.5% and 8%,
though current data suggests it will be on the lower side. On the positive side
is the recovery of IIP manufacturing growth from negative growth at end 2013-14
to a growth rate of 4.5% to 5.5% at present. This is underpinned by a strong
recovery in both capital goods and consumer durable goods production. The two back to back droughts in 20014-5 and
2015-6 have however taken a greater than anticipated toll on demand for
consumer durables produced by the organized sector represented in the IIP. A
decent Rabi crop should help revive rural incomes and demand for non-durables
consumer goods. This will, however, need to be re-evaluated as more data comes
in January.
Q2: It said private investment may remain weak next financial
year as well. What is your view?
A2: Assuming that all the financial sector reform measures
outlined in the budget (eg bankruptcy law) and elsewhere, are implemented I
expect a steady but slow recovery of corporate demand, investment and growth
during 2016-17. This would be stronger if the right choice is made in the
fiscal-monetary balance as suggested above. There is nothing in the data so far
to suggest a very sharp pick up in private investment in 2016-17.
World Economy
Q3: What is the effect of the Global economy on India?
A3: Many analysts are just beginning
to understand that we are living in a near-deflationary World economy and many
still don't understand that the Global financial crisis (2008) was more akin to
the Great Depression than the worst post-war recession.[i]
This was masked to a large extent by US QE till 2011 and in the oil/energy
market till 2013, by the Chinese debt bubble.
What this means is that the standard effects of monetary and fiscal and economic
co-relations that analysts have got used to in the inflationary post-war world
have been disrupted and often yield wrong answers.
Though low aggregate demand in developed countries was important in triggering
deflationary trends, it is has been underpinned by excess supply from continued
production and investment in China unmindful of the near zero or negative
returns. The largest effect of Chinese over-supply is on "un-differentiated
tradable goods", which in earlier analysis of Indian economy I have termed
"Globalised (part of the) Corporate
sector".
Coming specifically to the Indian economy, both the decline in oil
prices, from which India benefits and the collapse of nominal sales, revenues
and profits in the "Globalised corporate sector"(which surprised
analysts) are the direct results of the demand supply imbalances in "undifferentiated tradable goods." As
any improvement in this sector depends on US-EU actions on fiscal policy and
Chinese actions in abandoning its investment-export growth model, not much
relief can be expected in the next few years. Consequently India has to focus
on reforming policies that either constrain or could drive the growth of the
non-globalised parts of the economy. This includes Infrastructure, Agriculture,
Education, Real Estate and Construction, Defense and substantial segments of
the Manufacturing sector
Fiscal Deficit & Monetary Policy
Q4: The analysis said meeting fiscal deficit target at 3.9 per
cent in the current financial year would be challenging due to decline in
nominal gdp growth, though the target would be met. Next year, the fiscal
deficit target could be relooked at but no decision has been taken as yet as
gains from declining prices would not be much, seventh pay commission is there
and OROP is there. Your take?
A4: As I said after pay commission report, I Expect the
current year's fiscal deficit target to be met. The greater challenge is from
the equity sale targets, given the decline in the stock market since the
budget.
For 2016-17, I
believe there is a clear choice between (a) Sticking to announced fiscal target
& loosening monetary policy in line with the decline in CPI inflation,
which requires a repo rate cut of another 75 bps, or (b) holding monetary
policy tight (much tighter in real terms than it was 18months ago) and letting
fiscal targets slip by raisin govt investment in infrastructure. In my view the
former choice is a better one for revival of corporate investment & growth,
given other complementary policies.
Q5:
How much of a repo cut do you think is still required.
A5: Inflation as
measured by both the CPI and the GDP Private consumption deflator PFCE) have
fallen dramatically in the past two years. The PFCE deflator has fallen from
peak inflation rate of 11.3% in the 3rd quarter of 2013-14 (ie Oct-Dec 2013) to
1.4% in the 2nd quarter of 2015-16 (ie jul-Sept 2015). Similarly CPI inflation
has declined from a peak of 11.7% Novemebr 2013 to 5.4% in November 2015 (ie
-6.3% ). Over the same period the repo rate has been reduced by 1% (or 1.25% if
taken from the subsequent peak). Therefore the real repo has risen dramatically
resulting in a sharp tightening of monetary policy over the last year despite a
reduction in the fiscal deficit. This is true even if we use the core CPI
inflation rate which declined by 3.4%. Based on this decline I have repeatedly
said that a 2% reduction in the repo rate can safely be undertaken. However RBI has reduced the repo rate by only
1.25% points leaving scope for a further reduction of 75 bps.
Now that the uncertainty over the US Feds
rate hike is over, I would recommend an immediate Repo rate cut of 25 bps. If
this does not take place now, then I would recommend a 50bps rate cut at the
next Monetary policy statement.
[i] As
I pointed out at the IMF from 2010 to 2012, the use of policies that worked in post-war
recessions would likely extend this cycle by at least 2 years (ie 5-7 years) in
the US and last at least 10years in the Euro area/EU(ie + UK).
