Leif Eskesen, chief economist for India & Asean at Hongkong and Shanghai Banking Corporation (HSBC), expects the recent policy measures announced by the government to aid growth gradually. In an interview with Parnika Sokhi, he says the government should ensure the promises are delivered and the reforms continue in order to go back to eight per cent growth rate. Edited excerpts:
With some of the reforms in place, how do you see growth shaping up in the second half of this financial year?
Clearly, the recent policy measures were 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 period. We assume gradual recovery on the back of these reforms. We are looking at growth rate of 5.7 per cent this fiscal, 6.9 per cent in the next fiscal and 7.9 per cent in the year after. They have lifted the sentiments, now they need to deliver their promises.
We can see growth going back to eight per cent 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 Foreign Direct Investment (FDI) in other sectors as well. On the fiscal side, I think they need to implement more measures, because, in our estimates, even with a raise in diesel prices we are still looking at fiscal deficit of 5.8 per cent of GDP. I think the government will have to introduce additional saving measures to reduce the imbalance.
What do you think will be the 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 see inflation above seven per cent for the entire fiscal, and 7.1 per cent by the end of this financial year.
We think the core inflation will be persistent at current level for next couple of months. There could be a 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. The reform measures 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 the deficit before they go ahead with cut rates. The possibility that they may cut the rate in the October-December quarter has increased. Overall, the room to cut rates is limited. We expect RBI to cut policy rates by 50bps 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, because the easing has taken place at a time when the 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 their 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 after the reforms were announced. Do you think it is sustainable?
I think the capital flow story is more of push and pull kind. The reforms played the pull factor. With several easing by the central bank and it 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, as the situation in Europe remains uncertain. Things are moving in the right direction, but it is still a bumpy road. In the US, the presidential elections are going to take place and you have unresolved fiscal issues 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 reforms are implemented and their momentum continued. There is a need to contain inflation and twin deficits. The macro economic policies has to be kept tight.
