Leif Eskesen, Chief Economist for India & ASEAN at Hongkong and Shanghai Banking Corporation expects recent policy measures announced by the government to aid growth gradually. In an interview with Parnika Sokhi, he says the government should make sure that the promises are delivered and the reforms continue in order to go back to growth rate of 8%. Excerpts:
With some of the reforms in place, how do you see growth shaping up in the second half of current financial year?
Clearly the policy measures that were announced recently were positive steps in the right direction. We had built in assumptions in our growth forecasts that some measures would be taken towards the second half of the fiscal. The measures would take a while to kick in but the key thing is they have lifted the sentiments in a very short term. We assume gradual recovery on the back of these reforms. We are looking at growth of 5.7% this fiscal year, 6.9% in the next fiscal and 7.9% in the year after. They have lifted the sentiments, now they need to deliver their promises. We can see growth going back to 8% levels but that may take a while. Lack of implementation is always a downside risk to these expectations.
What more can be done by the government?
There are possibilities that they may open up for Foreign Direct Investment (FDI) in other sectors as well. FDI in insurance seems to be on the table. On the fiscal side I think they necessarily need to implement more measures because in our estimates even with a hike in diesel prices we are still looking at fiscal deficit of 5.8% of GDP. I think the government will have to introduce additional saving measures in order to reduce the fiscal imbalance.
What do you think will be RBI’s stance going forward? Will inflation still outweigh growth concerns?
Inflation risk is still a concern as food and fuel prices are expected to stay elevated. We basically see inflation above 7% for the entire fiscal. 7.1% by the end of the financial year. We think core inflation will be persistent at current level for next couple of months. There could be second round of impact of diesel price hike. The supply side of the economy is still struggling to keep up with the demand side despite the slowdown.
There is still underlying upside pressure on inflation. The measures announced by the government will pave the way for rate cuts but it is not given that they necessarily come in the short term. They may want to keep a check on inflation risks and more fiscal savings measures from the government to contain deficit before they go ahead with cut rates. The possibility that they may cut in the October-December quarter has increased. Overall the room to cut rates is quite limited. We expect RBI to cut policy rates by 50 bps in the rest of the financial year.
How do you think the trend in global commodity prices will have an impact on the Indian economy?
Global commodity prices have not shot up yet is because the easing has taken place at a time when global demand is weak. Europe is slowing, we expect contraction in several quarters going forward. India and China are growing at a pace slower than potential. Next year you may see commodity prices building up as growth picks up gradually. It is not a major concern for India as of now but it is important to keep an eye on.
India is witnessing strong capital inflows post reforms announcements. Do you think it is sustainable?
I think capital flows story is more of push and pull kind. The reforms they announced played the pull factor. With several central banks easing and pushing liquidity into the market, there is liquidity searching for yields globally. So that has been the push factor driving capital flows into India. Looking ahead, we still see some volatility in capital flows because the situation in Europe still remains uncertain.
Ultimately, things are moving in right direction but it is still a bumpy road. In US, the presidential elections are going to take place and you have unresolved fiscal issue coming up by the end of the year. Generally the trend is to see flows towards emerging markets continuing. What India has to do is to focus on the pull factor, ensure that the reforms are implemented, the reform momentum continues. Also, there is need to contain inflation and twin deficits. They will have to keep macro economic policies tight in India.