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Growth will turn positive in Q4: Pranjul Bhandari


We cannot rely on consumption but we should set the stage so that investment can come back at least in the next couple of years, says Chief Economist – India, HSBC Securities.

Would you reckon that the kind of economic damage that has been caused by the lockdown has been much worse in India as compared to any of the other countries in Asia? What are you pencilling in by way of the GDP number for Q1?
It has been a rather tumultuous quarter. We have seen a once in a century pandemic, we have seen an extremely stringent national lockdown and then we have also seen the pent up demand once the lockdown was eased. All of this in one quarter. So, it is going to be very interesting and very exciting to see what this one number GDP growth will encapsulate and where it will come.

In terms of growth forecast, we think the CSO will announce a number which is close to 17.5% contraction but eventually a couple of quarters or perhaps a year and a half down the line, we this number will be downgraded to closer to 25% contraction and I will tell you exactly what we think is going to happen. The way we collect data, we do not use a real-time estimate on the informal sector. For real time data, we use the formal sector as a proxy for the informal sector. This is fine during normal periods but this is not normal.

This is a time when the informal sector has done much worse than the formal and therefore if you use that practice, you tend to overestimate growth. We think our estimated growth is going to see close to 17.5% contraction but a couple of quarters down the line when the informal sector survey is available, this number will be revised down to 25% contraction.

How are you looking at the kind of stimulus packages that have been doled out at the start of the lockdown? There was a massive $266 billion credit guarantee on bank loans etc. Is it a long way before we see consumer demand and the manufacturing sector recover?
We have to be very clear about the fact that even before the pandemic, the balance sheets of most of the economic entities in our economy were stretched. The corporates had too much debt, the banks had too much NPLs, shadow banks had liquidity problems, households had already taken on too much debt and did not want to take on more debt very quickly. Then the government had a very elevated public debt number.

So the balance sheets were already stretched though nobody has been finding it easy to spend their way out of this crisis. Perhaps the only balance sheet that has some space was the central bank’s and the RBI has done everything it possibly could from cutting rates to providing liquidity to regulatory easing.

Meanwhile, even the government has stretched beyond what it could potentially do and has given a bare minimum stimulus, helping some of the more disadvantaged groups and small businesses. We had to strike a balance here, we could not go all out like other developed countries. We have done what we could and now we will have to just wait for the pandemic to take a back step back, so that economic activity can start coming up again.

In light of the India bond rates being higher than 6%, do you sense that we could see more Operation Twists to come in if indeed there is no stability anytime soon?
I am glad you asked. Things have really changed from the first half of the year to the second. The first half was tough for the RBI and it had managed two objectives. One was to keep the rupee from appreciating a lot and second was how to keep domestic liquidity flush to support economic recovery. It was able to manage the two fairly well.

The problem going forward is that a third objective has come into the picture which is how do you fund the fiscal deficit with huge market expectations that there will be a big OMO calendar. I think it is an extremely difficult time. It is tough for the RBI. It will have to play a very good balancing act but in my view, RBI will manage to balance it off. It will buy some dollars to keep the rupee from appreciating more, it will buy some bonds to help the government finance its fiscal deficit. LAF will be slightly elevated but hopefully it will not be more than the record high that we were seeing in May. Hopefully, there will be a way in which the RBI will be able to manage all of it but the truth is that challenges are only rising.

In light of the way the money markets have been going on, what is the view on both equity as well as the debt flows? FIIs have been big buyers in equities for the last few months now but I cannot say the same about the debt markets?
Central banks all over the world have been pumping in liquidity and you know all of this liquidity is chasing returns. Equity markets in India have looked attractive to many FIIs and therefore we have seen this sort of big rally in capital markets which is not in line with the state of the real economy.

How long do you believe we could see this sort of a contraction play out for the Indian economy?
I think that the quarter ending June for which we get the data today is probably the worst but having said that, the GDP growth is going to remain negative until the end of this calendar year that is December 2020. Only in the Jan to March quarter 2021, do we think year on year growth will become positive.

Of course on the back of this, we also assume that activity will be almost normal come 2021. In terms of some of the sectors, the one which is doing the worst is non-government services. This is something that we have seen across the world. Services which tend to be slightly more high touch, are doing worse than manufacturing. Manufacturing also will be contracting but perhaps not as much as some of the trade and transport services for the simple reason that manufacturers are also getting some sort of breather by not paying rents, by not paying salaries. They are being able to cut down on costs and therefore profitability has not fallen that much. The best sector of all is likely to be agriculture because the national lockdown was not really imposed there and lso rains and sowing has been very good. That would be the pecking order with non-government services doing worst than manufacturing and perhaps agriculture being the best.

So what would be critical to boost overall consumption?
I do not think you can rely on consumption the way we have relied on it in the past couple of years or perhaps a last decade or so for the simple reason that we have looked into this very carefully and we find that while jobs will come back and most people will be employed again, they will probably be employed at a lesser wage rate. Wages is something that is going to give and if wage growth is going to be weak, then demand is going to be weak and India could very well be stuck in a low wage, low demand kind of equilibrium.

I do not think consumption can be counted upon that much this time. If the government can give the right signals to support investment, that will be a very good step and some of it is about the government putting on more money in the investment sector which may not be very easy but some of it is also about regulatory easing and also policy certainty, which overtime attracts investments. We cannot really rely on consumption but we should set the stage so that investment can come back at least in the next couple of years.

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