The Big Picture – Indian Economy: A turnaround in sight?
good evening welcome to yet another edition of the big picture I am Santa Han the last few months witnessed a flurry of bad news on the economy front GDP growth slip to around five percent the worst levels in a decade inflation was taking to a high single-digit level and the huge current account deficit was raising concerns over the sustainability of India’s growth story suddenly there seems to be plenty of good news the wholesale price inflation has fallen to a 40 month low or five point nine six percent of the month of March even the most optimistic among analysts wouldn’t have expected to dub for the WPI inflation to have fallen below six percent in fact food inflation also has declined to eight point seven three percent in march from 11.3 eight percent in February besides prices of vegetables fell point nine five percent in the month of March as well another piece of good news was a crash in global crude prices brent crude has plunged below hundred dollar level prices of gold are also on a tailspin and these items were the largest contributors of india’s 6.7 current account deficit but now it seems things could look a little different from expected now how do you explain these numbers do these positive numbers result in a turnaround in the economy what should the government the central bank in corporates do in this new developing scenario to discuss all of this we have a panel of experts with us I welcome miss Reno Kohli from a staff member of RBI and International Monetary Fund she’s with me on OB from New Delhi also mr. are weak anuria former president Vicky with me in the studio on my extreme left professor NR Bhanumati professor at ni pfp and some of energy of the national she’s a national policy editor with the economic times thank you all for joining me on the show today in fact let’s just start by discussing the numbers and if I if I can ask professor NR Bhanumati when we talk about the WPI inflation we talk about numbers it set a 40 month low gold prices have come down there are twenty-six thousand five hundred crude oil prices have come down what do these numbers really mean well the all these numbers are really positive for economy like ours particularly where we are actually struggling with a very very high current account deficit of six point seven percent although our numbers for the fourth quarter might be a little more positive compared to the third quarter but all this indicates that we are actually looking forward for some kind of positive sentiments building up in the business community in this country right so now what do you have to say about these numbers do you think that you know these numbers are actually can bring a turnaround in the economy or what do you have to say well I don’t think they can really turn around the economy but there definitely are very important given the kind of situation we are in we’re in a very tight spot and I think the government showed enough courage by taking some very strict reform measures also I think it’s going to be politically helpful because he with with crude oil prices coming down it gives scope for petrol diesel prices to come down which have been a huge political hot potato for this government also it helps in bringing down inflation again which is very important and we need to remember that all this seems to be happening just before the elections are due in the States so they miss the Chilam Balam who showed guts and the government which showed that they could walk the talk by taking some stuff reform measures should now be able to at least temporarily I am saying temporarily because we do not know how it’s going to really pan out take the benefits of these reform measures let us begin mr. RV kanoria at this point in time so what do you feel the industry has been disappointed for quite some time now asking the central bank the government to take some measures what what sort of you know reaction will this particular prices the crashing prices will be garnering from the industry is it a big big positive news I think we needed some luck after a lot of bad luck that we’ve been having in the country and so this news is definitely welcome let’s look at the petroleum prices I think it has an impact both from the point of view the current account deficit as well as from the point of view of the fiscal deficit because it’s likely to reduce the subsidy burden of the government right so the decline in petroleum prices which had gone up much above $100 is certainly welcome then we look at the next pair of gold prices I all right there seems to be some problem with the audio over there from mr. kanoria I’ll try and go back to him in just a bit in the meantime let me go to mr. Rana Kohli BAM we will go deeper into the discussion but your initial reaction or no one going to foreseen this sharp decline in WPI inflation what you have
to say well it’s a positive and the question of how is to what extent is it sustainable till till last week one would have thought that perhaps you know these will research inflation will research as demand resurfaces but now given the situation in the world markets and the repricing of oil and commodity prices they are tumbling very rapidly along with gold and the view is that China’s slowing down and the triggers been chinese gdp data so it does appear that for the rest of the year they play they will probably remain very subdued at least that’s what the focus by all international agencies say so you know that takes us over a medium term positive and domestically too it’s a good time where oil price subsidies are being passed through correction is taking place so overall I would say both inflation all three inflation current account deficit and fiscal deficit indicators all three the fundamentals the key fundamentals which has led to a derating of the Indian economy are on the improvement part right absolutely yeah you know although I’m pretty intrigued I’m in commodity prices there is a reason I would like to know and maybe a fellow panelists can enlighten us on the supply side as far as vegetables and fruits are concerned the one good indicator which are coming right now from private met agencies is that we like you to have a normal on soon if that happens then i can understand but what do you think I mean to me that’s a point to wonder while I can understand on oil and gold but as far as vegetable prices or fruit prices are concerned what really has changed the picture well should I yes yes well if you see you’re right actually if you see the disaggregated data on WPI it is only the core inflation which is actually coming down sharply but on the primary article sign is still it we are in a very elevated levels much more uncomfortable level than what we expect but certainly if you see that trend even there there is some kind of a downward movement yeah but having what has changed you think well there could be really one helps to really look at all this you know what a commodity level but generally if you see the oral going forward if you see some of the futures markets and the futures market the price of not just kamat is like you know metals but also on the food prices there’s slightly slowing down you know there may be some kind of demand election happening in the world market not just in the Indian markets so these are with these numbers the fact remains that also coming back to the growth decelerating growth samar remains a main concern for the government also at this point in time so I’d like to ask you when we look at these numbers how much of a you know help will it be in reversing this trend perhaps so see the first thing I think which everybody is going to talk about when it comes to growth is interest rates so because of inflation rates coming down and because of that because there’s a cooling in the in the commodity prices which means it will impact our trade deficit as well as our current account deficit to as well as fiscal deficit as was rightly pointed out these are factors which the RBI has been warning about when it’s talking about rate cuts so the first expectations are that you know may third monetary policy coming up we see a easing of rates now that means easing of rates means demand goes up and industry will definitely want to see some softening of rates because remember investments have come down dramatically right so so yes a lower interest rate regime at a time when dip you know when everything seems to be going against could be the push to industry to really pick up their investments and that could revive growth I think absolutely that’s also one of the key challenges in front of the government as it goes ahead into the election we will be talking about these numbers what they mean for the Indian economy are these numbers that we’re seeing the falling prices here to stay are they sustainable come back after a short break welcome back you’re watching the big picture now let’s talk about these numbers these falling numbers the Consumer Price Index still with the WPI inflation falling sharply is still high and is expected to remain in the band of nine to ten percent in this looking at this do you think further easing of the monetary policy cutting down of interest rates is going to happen Mather the industry you know has come out and said that they are expecting a car test sharp is one percent let me go to mr. kanoria first with that mr. kanoria if you could answer that no I think we’ve been talking about the interest rate reduction and these numbers are encouraging I think a little bit of luck as i said is flowing towards India and the government so there’s a good opportunity to actually take this step
of cutting back on interest rates because we are more concerned about the wholesale price index rather than the Consumer Price Index because the Consumer Price Index also has a built-in inefficiency in our delivery mechanisms which needs to be tackled differently and not purely through the interest rate mechanism or by tightening the monetary policy so as far as industry is concerned we would definitely look forward to a interest rate cut all right let me go across to miss Reno collina RBI a man in the past has said it very clearly that the widening see ad the current account deficit is what it’s putting pressure on it from cutting these rates now do you believe with these new numbers that have come in that pressure would ease to a certain extent and the government will and the RBI I beg your pardon will be able to take those steps that it wasn’t able to take earlier I should imagine that the current account deficit is said to improve in the january-march quarter for which the trade deficit numbers are already out definitely there is a shrinkage but you could typically that’s a seasonal trend the trade gap narrows in January to March but for the next quarter to april to june just mainly from the importer gold amanda coming off and oil in commodity prices i think that improvement will continue so that would have a bearing i should imagine upon the Reserve Bank’s view regarding interest rate cuts definitely it’s a positive for in that in that sense someone would you like to add to that well you know I’m a little I’m not quite sure on the gold demand I mean of course there’s no two ways that the current account deficit should come down because oil prices will come down and that would that would give them the elbow room which is needed now at the time in the gold demand was surging I remembered there were questions as to why is the gold picking up so much why are people still investing in gold one reason for traders and big-time people was hedging now at that point also this was the case is there an alternative to gold as an investment destination now that would depend on things like the equity market moving up etc which again is dependent on the growth mood and the sentiment and investment mood so really I mean gold demand will come down as far as the big house traders are concerned but I’m a little intrigued because a lot of you know retail investors have got gold in their portfolio today and if they have gold in their portfolio today lower prices means getting more gold for the same price so would I like to withdraw from my gold portfolio but again that may be a very small portion so the point is how much gold demand will really go down is something I’d like to watch myself but as far as current account deficit and oil prices coming down that should be a big relief which the RBI has been mentioning the finance minister and the Prime Minister have said that Miss Reno Polly wants to I think give a reaction to that go ahead man yeah yeah I would just like to respond the assessment of coal demand there are two components to it one is the speculative demand and the second is the household demand I would agree that the traditional demand by householders would remain and perhaps you know slightly go up but as far as the investment point of view is concerned there are two developments one is that the future price uncertainty with the belief investors believes that the gold cycle is ending at last has increased a lot of in certainty and futures in the gold 400 tons reportedly has already been in a locked up in gold futures has already tell June has already been put up for sale there are serious heavy outflows from exchange-traded funds as far as gold is concerned so the very fact that the uncertainty has increased downside risks to holding gold would suggest that the speculative demand is lastly off seconds also inflation coming off also increases the real returns on alternative assets so I I I think one can definitely be sure that at least for the current quarter that is April to June the current account deficit will not reflect you know in october-december 30 2.6 billion dollars of current account deficit was composed of 6.4 billion dollars of just gold imports so i would think that definitely we are seeing a correction there right now let’s also talk about and let me get here professor in our family at this point in time do you think then this rally is sustainable we saw the sensex today surging above 300 mark 300 points high do you think that this would in any way change perhaps in the months to come this is a talking point we should be talking about change in India’s macroeconomic situation I i would like to look at this inflation numbers little more carefully I mean the kind of number
that you have seen I am not really sure it is going to be the medium term trend it may be one of to some extent but the inflation expectations are not really in sure about declining trend in the future now the reason for yesterday’s crash in the gold market is because the inflation expectations in the US markets are coming down right so there are some you know the inflation hedge that we used to think about the gold is shifting from gold to other financial assets in India it all depends on what the inflation expectations are going to be my guess is that we may be really reading too much on this number that less than six percent we may be settling at six six six point two percent for the medium-term see even then if the trend in core inflation continues there would be some kind of head room for the central bank to react through interest rates but if his last round also there was a reduction in the interest rates but it is not really been transmitted to the you know investments and it’s not been trying to translate to the lending rates so there are other issues like the bank balance sheets I think we need to really look at this bank balance sheet before we really start at this point I’d like for mr. kanoria to react on this even if you’re looking at these rate cuts but there is still some time before you know we can see the final effect of these rate cuts you’re expecting you’re saying the industry now expect the RBI to cut interest rates on the third of May tell me what you like what more are you expecting from the RBI at this point in time is a 25 basis point a rate cut good enough no no 25 basis point was done in the last monetary policy of the RBI and I think that it has to be attacked in two ways one is the rate cut and also to improve the liquidity all right we seem to have lost mr. kanoria audio again my director is trying his best to get his audio back in the meanwhile so why would you like to continue where yeah I mean I i don’t know mr. kanoria would have explained this better but you know I agree with Professor here that you know the rate cut firstly has to translate too real I mean the RBI cuts raid which has to translate into L rate cuts by the banks to is one area is a nice economy i just mentioned liquidity you know so the bank’s position is very important here liquidity of in industry is also very important and and i think you know the fact that demand contraction is taking place i mean that is a big that is a big if particularly in sectors like FMCG or in any other things which is which is actually demand lid you need basically public sector companies i think or big projects to really take off so the government will need not only the help of the monetary policy but it will keep need to push its it’s at least the government companies to go in for the big investments you know things like road building infrastructure real estate social sec I mean they will be talking about more of that yesterday I’d do this yeah i mean when there is a declining the interest rates the banks are actually increasing the depositories right so there is some problem in the bank balance sheets we really need to look at before all right mr. kanoria is back with us sir please go ahead your audio just went off in between yeah okay so as i was talking about improving liquidity simultaneously with a rate cut so both the CRR as well as reduction in interest rates need to be handled in tandem the second point is that we cannot wish away the other reforms therefore the ground realities of land acquisition environment clearances availability of money yes I think these all will have to be addressed simultaneously if you want to bring investment back so we should not become complacent about a situation which is largely caused as a result of global easing and you know gold many people have talked about the reduction in price of gold but nobody has sent the reason for it is really the European crisis and Cyprus having to sell its gold which has triggered uncertainty about other countries also having to do that to correct their own fiscal situation alright so I feel that the Gold is not going to be such a attractive investment for other than household investors you know the speculative investment point which was made I quite agree with it that we will likely see a reduction in gold imports in the country all right hold on to that thought we will continue discussing this room are I know you want to make a point we’ll be back after this short break to
discuss what the industry what the central bank and what the government should do now the way ahead stay with us we’ll be back welcome back you’re watching the big picture in this segment we are going to a try and look ahead with these rate cuts that we are seeing what is the way ahead what can the three body is the government the central bank in the industry do and hope for from here on let me start by asking professor n our panel multi and mystery Nicoli that what what to the policymakers in the industry do now in this sort of scenario should the government really speed up reforms to facilitate this turnaround that we are seeing otherwise we won’t be able to take this you know opportunity so to speak professor ponder motive all along I have been of the view that the kind of slow down that we have seen in investments are the growth is largely because of the lack of confidence the confidence channel was one of the biggest channel that was affecting investments and now from since sep tember we have seen a number of measures and we have seen that for finance minister I mean crisscrossing the continents and trying to invite investors in fact he’s also scheduled for this recent using all these things are actually and added to that the global developments in the recent period is actually giving a kind of optimism in rural investment sentiment should be giving in 0 positive sentiments in the overall economic activity in the country RBA what you should do I said it needs to really track inflation expectations if the inflation by their own assessment if it is coming to six six hundred percent they should go ahead in continuing the downward cycle in the interest rates at the same time as mr Connery has said Cheryl issues has to be addressed by the government you know so there is no other way it has to be multi-pronged approach to really revive the overall investment sentiment in the system not just interest rates i think we are talking more on interest rates and and i have been saying that you know the peak investments happened and when the interest rates were at peak so the peak growth also happened when the interest rates are wet at the highest in the 2007-8 situation it’s not just interest rates I think there are many other issues that needs to be addressed moscone do you agree a multi-pronged approach is what we need at this point in time if you have to channel these figures that we are talking about today oh I would put it somewhat differently see the improvement in both the current account deficit and inflation is is mainly coming from overseas developments that is falling oil and commodity prices but domestically that is combining with the low demand so the pricing is see so it is very helpful going for head but at the same time the FAQ time what is happening is that globally there is a very rapid pace of repricing of assets and that is serving to increase uncertainty notably that of prices and four for four in 10 businessmen or other exporters the biggest price that they face is that of the relative price which is the price of your goods the exchange rate so i think that the government can do a rethink their i would say that a stable rupee which is in line with its fundamentals will be very very good for exports let us not forget that despite the massive depreciation since september-october 2011 exports haven’t revived such is the extent of erosion and competitiveness of indian exports so I think there they really need to attend to that and that could deliver some stimulus particularly as one of the causes which is driving the golf all of gold prices is the is the belief gaining strength that the US economy has to reach the turning point and it is setting improve gold was the the fact that coal prices were rising was exclus every link to QE and money replacement of the dollar but if the money is shifting towards dollar and the dollar is appreciating then the gold cycle could perhaps be ending for some time so if the US recovery is said to improve I think the important thing is to look at the exchange rate and X all rights all right all right shoma I’d like to take your views on this the current account deficit the fact remains that there is a need for foreign direct investment perhaps the government you know these numbers are a blessing in disguise for the government but the government is also in the past taken strong steps made itself clear what it wants to do and where it’s heading in terms of what growth rate it wants what numbers at once do you think the we are going on a right path yeah but we are on the right track maybe the government needs to do much more to really assure investors that we have the right environment for investments to come in regulatory issues which have been dogging investments need to be really cleared out some of it is
coming you can see in the power segment for instance the regulator’s view that you know because coal prices have increased tariffs need to be reviewed comes as a big boost you need some clear you know clarity on the coal issue you need clarity on environmental clearance which is kind of taking off with the CCI so the government’s push for seeing that there is a good investment climate will be very important and I think mr Chidambaram you are in safe hands with him there and dr. Subba Rao as the RBI governor but I think you know one thing which I think mom mentioned and I would agree that we can’t forget the global scenario in India as a part of the global scenario so basically if these prices have come down there because of contraction whether it’s China or otherwise and that should not be very good news for our export exporters right and and most importantly like again mentioned the rupee is very important over here we may lose out some of the upsides of all this if the rupee continues to fall so we need to see that the rupee’s tendons we need to see that our exports pick up and therefore beyond the monetary policy I think one should look at the export-import policy which is you also where we expect right all right we’re running out of time absolutely well thank you all of you for making your points very clear over here so the question was the in an economy is a turnaround inside perhaps yes we are somewhat on the right path a lot of factors really affecting what happens in the indian economy as well that cannot be ruled out thank you so much once again for joining me on the big picture will be back again with another debate issue thanks so much for watching