We are transitioning to a more robust global economy: Chetan Ahya

Morgan Stanley's chief Asia economist says there is good news for Indian, regional exports

Chetan Ahya, global co-head of economics and chief Asia economist at Morgan Stanley, the global financial services entity, says global recovery will be on a sure footing. In an interview with Anup Roy, Ahya says there is good news for Indian and regional exports. Edited excerpts:

What is your expectation from the Reserve Bank of India's policy review?

We are not expecting RBI to change the policy rate or stance. They might reduce their concerns on the inflation outlook, which probably could be interpreted as a bit more dovish by the market. We are expecting RBI to get back on the rate hike path in the second half of 2018. Until then, they might hold rates steady.

We are expecting inflation to go up to the 4.5-5 per cent range by end-December. That doesn't really warrant a rate cut now. As you see the normalisation of the inflation trend in the background, you will see pick-up in growth and demand. We expect gross domestic product (GDP) growth to accelerate back to about eight per cent (yearly) soon.

RBI says the effect of demonetisation would be transitory. Do you agree?

Largely but some aspects of that decision have left a longer lasting impact, particularly in real estate. We see that being corroborated by steel and cement production data. So, it's not only realty sales but it looks like it has an impact on construction activity as well. Apart from that, the consumption impact has been transitory, as is visible in two-wheeler sales. I always look at two-wheelers as a good indicator for what is happening to discretionary consumption. Two-wheeler sales in May have been growing in double digit, the second month of positive data after demonetisation. This shows discretionary spending is back.

Do you expect the capital expenditure cycle to turn around? How about capacity utilisation?

Capacity utilisation has started improving. When we do the analysis of its trend, the big link of that has been driven by what happens to export. These have turned systematically for the past few months-- the last two months have been extremely strong. Wearing my global hat, I do think that this recovery in export that we are seeing in India is likely to be more sustainable. In fact, the sequential trend here in the past six months has been the best since 2010-11.

This is a very different trend. A simple average of the past five years won't do justice here. If you see the underlying drivers of the global economy, it seems the present trend is more sustainable. This would help improve the capacity utilisation. The taper tantrum was a trigger but India was using policies which were misallocating (resources), and the current account deficit and inflation were high. You had to take a hit on consumption. That's the only way to fix inflation but it affected capacity utilisation.

Now, consumption is looking like normalizing. And, you see external demand parallely moving together. That will help improve capacity utilisation and, therefore, help improve capex. You will see a visible turn by Q1 (the first quarter) of the calendar year 2018.

What are the risks to the bull story?

Two-fold. We are watching the US economy. If the US goes to a downturn, it is unlikely to be a deep recession but will hit the external demand for India. We think this is critical at this juncture, in terms of repairing the corporate sector balance sheet, getting new growth equity without having to lever up. You have the capacity but you need capacity utilisation, which can come through export.

The second risk is, it would be interesting to see what happens to the government's fiscal policies before the next general election. Right now, we are seeing some relaxation of the fiscal policy philosophy at the state level in the form of farm debt waiver.

What gives you the confidence in saying the export case is different this time?

This global recovery is different. What we have seen since 2012 is 'bumpy, below par and bitter'- BBB recovery. That has been going on for a while. We're now changing our narrative on the global macro outlook. We are transitioning to a global economy which is more robust. We are right now seeing recovery in a broad-based manner, across geographies. The US, Europe and Japan are all doing well within developed markets (DMs). Within emerging markets (EMs), commodity importers and exporters are both doing well. In Asia, in the 10 countries we cover, we have upgraded GDP growth (estimates) for seven. I have been doing this for years but I can't remember the last time we were upgrading GDP growth in Asia. We looked at 35 countries (both EMs and DMs) and saw that in the past two quarters, there have been a meaningful acceleration on capex, too.

So, it is not only consumption; the investment cycle as well has picked up globally. That gives us the confidence that this is a different recovery and on a surer footing, more policy-driven and one or two large economy-driven.

Are the chances of a currency war subsiding?

I would not call it a currency war but the tensions you have seen in the currency market are a reflection of divergent growth trends. The EMs ex-China growth rate has been decelerating since 2012 and 2017 is the first proper year of recovery. When the US was initially accelerating and then staying stable, the US central bank was moving towards the other direction, tightening the rates. Whereas, EMs were in bad shape. Now, the EMs ex-China group is accelerating, the US is stable and we think the dollar has peaked against EM currencies. So, you will not see the same tension in currency markets.

Is that why we see currencies being more stable now?

Yes, essentially the same fundamental. EMs are now not generating growth with loose fiscal and monetary policies. They have pretty high levels of real interest rates. The differential between the EMs ex-China real rates versus the US is 375 basis points. That's a huge buffer. Therefore, we see in terms of investor confidence, the currency risks having reduced is giving a huge confidence.