Q&A: Robert Subbaraman, chief economist, Asia (ex-Japan), Nomura

'At this stage, eight per cent growth is about right'

With the Reserve Bank of India (RBI) increasing key interest rates for the tenth time since March 2010, the possibility of a slowdown in the Indian economy's short-term growth momentum is becoming increasingly real. However, Robert Subbaraman, Nomura’s chief economist for Asia (ex-Japan), in an interview with Devjyot Ghoshal, said lower growth may not necessarily be something bad for India, especially considering the supply-side constraints. Edited excerpts: 

There have been a number of concerns on India’s recent industrial production numbers. What is your outlook on this, given the output has declined? 

I think the industrial output growth has certainly come down, and there are signs of growth weakening. The weakness seems to be concentrated in investments, the industrial output and the capital goods sector. Consumption has been holding up pretty well and I guess the issue RBI faces is of consumption running ahead of investment. The economy was already supply constrained. So RBI is in a difficult position considering growth is coming off the boil a little bit --- below eight per cent. We think it would remain below eight per cent in the coming quarters. However, inflation is still elevated and core inflation has been rising. In this environment, RBI needs to do more, and we think it will. 

But inflation continues to remain a problem. Going ahead, how important an issue do you think this would be? 

It is still an issue. It is going to remain a sticky problem and part of the issue is the fact that India’s economy is taking off --- the demand side is taking off, the middle-class is gaining an appetite, be it for higher calorie protein food or for more durable goods. I think one concern is the supply side of the economy isn’t keeping up. That is leading to this nexus where inflation is going to remain sticky. The economy is running into its speed limits. 

Companies are seeing their margins squeezed. Do you see this trend continuing or would it ease out? 

I think that depends a little on what happens to commodity prices and the labour market wage pressures. I think the tight margins would remain a concern for a while, and thus, so would inflation pressures, since one way of dealing with the margins is to pass on higher costs to consumers. I think it would remain an issue. 

India’s gross domestic product growth numbers may see a downward revision. Where do you think India would end up at the end of the year? 

I think around eight per cent, maybe slightly lower. But I think that’s probably where India wants to end up at this stage, because if it were to grow at nine or ten per cent, it lacks the supply side capacity at the moment. You would get higher inflation. You would get more import absorption and your current account deficit would turn wider. I think at this stage, eight per cent is about right. 

I say India has the potential to grow at nine or ten per cent, but the supply side (needs) more investment in agriculture and infrastructure, (and) creating the right environment for private investment. 

A striking statistic to me is the foreign direct investment net flows. In 2009, they fell both in China and India because of the financial crisis. However, in 2010, they rebounded very strongly in China. In India, they have continued to fall even further. India was doing pretty well before the financial crisis. I think it needs a rejuvenation of all these things to secure more investment.