The Reserve Bank of India?s rate cut would at best be 50 basis points for 2012-13 even though the government has taken several policy measures, says Leif Eskesen, chief economist for India & Asean, HSBC. Eskesen tells FE?s Aparna Iyer that the government must continue with reforms to attract foreign money even as the RBI tries to find a way to tackle inflation. Excerpts:
Do economic indicators suggest deceleration will get worse?
We are definitely seeing deceleration in manufacturing and the key reason that has shown up in PMI is that although there is a slowdown, the economy is now stabilising. The reasons for the slowdown is that exports are falling as there are global headwinds. It is also reflection of global economic uncertainty. External spillovers will continue to dampen exports.
Lack of infrastructure, reliable power domestically are the reasons behind the manufacturing slowdown. But we do expect that gradually, on the back of the reforms announced, there will be an improvement in the manufacturing trajectory of India. Our growth forecast is still 5.7%. Next year, we are seeing a growth of 6.9%. A little more traction on reforms and stabilisation of global conditions would help expedite the recovery.
Considering the impact on fiscal deficit, where do you see it this year?
Even after the diesel price hike, we still think the actual subsidy bill would turn out to be higher than what has been budgeted. Tax revenues would be lower. Fiscal deficit could be 5.9%. If they want to bring down the fiscal deficit, they need to take more measures and I think that is possible. The subsidy reduction would be gradual. But I think it is possible to continue with more subsidy cuts. But given the fact that we are already in the second half of the fiscal, we need to cut discretionary spending.
Your forecast on inflation and rate cuts for the fiscal year?
Inflation is both structural and cyclical problem. Because of the slowdown, the supply side has been stuck. Infrastructure, investment has suffered. These factors have constrained the supply side. However, on the demand side, consumption continues to be strong. That is the reason why there is less room for monetary policy and that is why the fiscal policy needs to be tightened. Our inflation forecast is 7.1%. For this fiscal, we are looking at only 50 basis points for 2012-13. And the reason is that because of the supply side inflation there, we cannot invigorate growth aggressively. We still need to see more traction in reforms.
What is your outlook on the current account deficit?
I think the deficit will remain elevated. We are looking at an average of about 3.5% for 2012-13. Since July, oil prices have gone up which will push the import bill up for that quarter. We have also seen exports being quite weak. The positive thing that policymakers need to do is keep the macroeconomic policy tight and be cautious about monetary easing to ensure fiscal policy is tight. They need to continue with structural reforms as it helps attract capital flows and helps finance the current account. There could be scope to increase the ceiling on debt flows as well.
The search for yields could direct dollar flows into Asia. What is your forecast on the rupee in this context?
On the rupee, we had revised our forecast for this year to 52 and we are already there now. The currency would remain at these levels this year. But there is scope for it to strengthen even further. We think with more traction in reforms and the global situation stabilising, the rupee could rise to 49/$ by the end of 2013. It will strengthen, but there will be lot of volatility involved.
