29 October 2014
Economy
Expert Speak
Tamper down expectations of reform and growth
Cautious on rate cut and INR
We hosted a concall with Mr. Abheek Barua, one of India's leading economist and commentator.
Key takeaways are the following:
Government's approach to reform is informed by more gradualism and consensus building
and expectations for more radical and big bang measures should be tampered accordingly.
India's potential growth rate is now lower at 5.7 to 6.1% as productivity measures indicate
a sharp drop in the current phase in view of yet to recover corporate balance sheet and
presence of excess capacity in many sectors.
RBI is expected to stay cautious in cutting rates despite the sharp fall in inflation due to the
possibility of reversal in services inflation. Hence earliest rate cut is expected by 4QFY15.
Expect INR to depreciate to 64-64.5 by Mar-15. In this context the warning by Dr. Rajan on
unhedged corporate positions should be considered seriously.
Mr Abheek Barua
Consultant, ICRIER
Mr. Abheek Barua,
currently with ICRIER as a
Consultant, is an well
known economist and
commentator. He has
been the Chief
Economist for ABN Amro
and HDFC Bank besides
working with Crisil and
Merrill Lynch. He has
been actively associated
with policy framing at
Ministry of Finance, RBI,
Planning Commission and
IBA.
I. Reforms - expect gradualism
Background:
There was an expectation of radical reforms post the new government
of the Thatcher/Reagan variety.
Subsidy:
Some are disappointed with the continuation of subsidy and other transfer
schemes.
Recent push: However, recent measures such as diesel deregulation (a tactical move
on the back of fall in commodities), gas price hike, etc. has given a fillip to the reform
process.
No big bang:
In general the government's attitude to reform is defined not by a big
bang approach but oriented towards better governance, empowering bureaucracy
and effecting procedural/regulatory changes.
Consensus building:
Recent move toward denationalization of coal and labour
indicate a balanced approach to weigh considerations for different stakeholders.
Disinvestment:
The government seem to have a deeper commitment to reform the
PSUs to bring them back in shape following Gujarat example.
Tax reform:
With the full team in Finance Ministry in place we may now see some
progress in these areas.
Tight fisc and RBI autonomy:
However, the two clear signals that they have given
relate to i) fiscal consolidation and ii) maintaining autonomy of RBI (though FSLRC
may change some of the aspects of it).
II. Potential growth rate is only 5.7-6.1%
The potential growth rate for India is now lower at 5.7% to 6.1%.
While the FY15 growth rate may be at the lower end of the band at 5.5%, during FY16
cyclical upturn may breach the upperbound somewhat at 6.5%.
The growth during 2004-08 period is to be explained in terms of sharp rise in
productivity (in part enabled by healthy state of corporate balance sheet).
Dipankar Mitra
(Dipankar.Mitra@MotilalOswal.com); Tel: +9122 3982 5405
Investors are advised to refer through disclosures made at the end of the Research Report.
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Expert Speak
Post crisis the productivity factor dropped and despite a moderate uptick during
FY11 it dipped again (unlike in Australia where it revived more durably from the
post crisis decline).
It is difficult to revive the investment cycle and improve productivity rapidly in
the present context with the existence excess capacity in many sectors.
III. RBI to stay cautious in deciding to cut rates
While inflation has fallen sharply, RBI is expected to stay cautious at the 6-7% CPI
inflation zone.
There is a possibility of reversal in easing inflation especially in service sector
inflation.
Despite fears on the contrary, food inflation has not been generalized into the
wider basket of CPI inflation.
There is a 60% chance of a rate cut in 4QFY15. US FED move would also weigh.
We are yet to achieve the long-term inflation target of below 5%.
IV. Warning on INR front
Given that the real value of INR as per REER measures shows an over-valuation of
17% (although the measure is somewhat exaggerated by taking CPI as a
benchmark)
This calls for some correction. Expect the INR to touch around 64-64.5 by year end.
In this context the warning sounded by Dr. Rajan of corporates' unhedged position
is a potential risk, deserves particular attention.
29 October 2014
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Expert Speak
N O T E S
29 October 2014
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