Q3 could see 4.5-5% GDP growth: Kaushik Das, Deutsche Bank

For FY20, we could get stuck at 5% growth compared to 6.8% that we had last year, says Kaushik Das, Director and Chief Economist - India and South Asia, Deutsche Bank. Excerpts from an interview with ETNOW. The macro data is pointing towards weakness in the economy. GDP is at a six-year low, manufacturing is contracting, the fiscal deficit number has crossed the full year target, core sector is showing contraction. Could there be more pain?Deutsche Bank had forecast a 4.5% GDP growth for Q2 and so we are not surprised. But given that India’s potential growth rate is 6.5-7% and we are now down to 4.5-5% in the last two quarters, obviously the numbers are not good. Going forward also, the feeling is that the recovery would be quite shallow and in the third quarter (October-December) also, one could end with a 4.5-5% GDP growth at best. January-March (Q4) could be a bit better because of the base effect, but for the year as a whole, we could get stuck at 5% growth compared to 6.8% that we had last year. This is with respect to the potential growth rate of 6.5-7%. India is growing 200 bps below that. It is a cause of concern for policy makers and you need to think what you need to do to get growth back to at least 6-6.5% in the next financial year. A bigger issue is the problem faced by NBFCs. RBI is cutting interest rates and probably would continue doing so, but unless the NBFC sector problem is solved along with that of the credit market, recovery would remain shallow for the time being. There is still a lot of pain in the NBFC sector. Even though there is an expectation that at the next monetary policy, we will see the RBI slashing rates by another 25 bps, do you think most of the heavy lifting will have to be done by the central government? If the government exceeds the fiscal deficit target, the rating agencies would come down like a ton of bricks?We already have a view that RBI will be cutting rates not just in the December policy, but going into 2020 as well. We see the terminal repo rate coming down below 5% -- towards 4.75% or even below that. RBI will keep the economy in a liquidity surplus state so that support and transmission happens. But the bigger issue is what to do with the NBFC sector? One needs to buy assets of the NBFC sector which are quite toxic. Unless you clear the NBFC problem, one can’t get the risk aversion out of the system. On the fiscal side, the government’s hands are tied. The government is trying hard to meet the fiscal deficit target. I do not think the government would want to borrow additionally from the market when you borrow more from the market, the longer-term bond yields will tend to go up and that will cause a problem. Remember, Moody’s has just downgraded India’s ratings outlook a few weeks back and S&P is yet to come out with their review. You do not want to miss the fiscal deficit target. Markets are always bad for the debt market. Even if RBI cuts interest rates, it will have a negative impact on bond yields. My view is that the government will try hard to meet the fiscal deficit target. On the other hand, RBI would be continuing to cut interest rates and keep liquidity flush in the system. Additionally, it has to try to solve the NBFC problem so that growth gets a boost, at least in the next financial year. We are given to understand that the Finance Ministry could be pushing for an RBI backed special purpose vehicle (SPV) to take over the toxic assets of these NBFCs. That could be a possible solution, along the lines of the Troubled Asset Relief Program (TARP) which the US had at the height of the Lehman crisis. Do you think that is a possibility?This has been under discussion in the last few months -- since the IL&FS episode happened. In 2009, when we had the global financial crisis, RBI gave a special liquidity window to the NBFCs, where the collateral that the NBFC placed to get the liquidity, was backed by the government of India. It became a risk-free asset against which NBFC could come and borrow. But at that point of time, most of the NBFCs did not come and borrow from RBI because the fact that RBI had a liquidity window itself gave a lot of confidence to the market.

from Economic Times https://ift.tt/2P0kI2e