India's economy might gain some momentum in 2020 given green shoots popping up here and there, but it would struggle to achieve 5 percent gross domestic product (GDP), according to Jahangir Aziz, head of emerging markets economic research at JPMorgan .
In an interview with CNBC-TV18, Aziz said that things were not looking very good on the growth front and hopefully next year GDP would be slightly higher at about 5.5 percent.
“We might get some improvement at least on a seasonally adjusted momentum basis, but that is very difficult to do with the kind of quality of data that we have. So we might get some momentum increase given some green shoots popping up here and there. However, nothing to write home about and this year we will probably struggle to get 5 percent gross domestic product (GDP) and hopefully next year will be slightly higher to may be around 5.5 percent. Things are not looking very good on the growth front,” he said.
He added: “More or less activity data everywhere else is looking terrible particularly on the manufacturing side and there is a concern that this is already spread into consumer, but if you look at forward survey data, all of them point to a reasonable pick up taking place starting from Q2 of 2020 and then going into the rest of 2020. So, our sense is that you are probably going to see a much better turnout through the course of 2020 than at present."
Speaking on Reserve Bank of India’s (RBI) Operation Twist, Aziz said: “The 10-year sold-off because the RBI went against market views and did not cut (rates). Now, the RBI is trying to make up for that increase in 10-year rates by doing this thing called Operation Twist. You usually do Operation Twist or other countries have done Operation Twist when you do not have any more space left in standard interest rate policy.”
Aziz said that the headline numbers were going to be terrible. Food inflation has picked up, and most likely it would keep picking up until February, he added.
Edited excerpts from the interview:
The third quarter is at an end now and from what you have heard and seen, does it look like it is an improvement over the second quarter in anyway?
Possibly, we might get some improvement at least on a seasonally adjusted momentum basis but that is very difficult to do with the kind of quality of data that we have. So we might get some momentum increase at least given with some greenshoots popping up here and there. However, nothing to write home about and this year we will probably struggle to get 5 percent gross domestic product (GDP) and hopefully next year will be slightly higher, to may be around 5.5 percent. So that is basically what we are looking at for fiscal year 2020 and fiscal year 2021 and so, things are not looking very good on the growth front.
But 5.50 next year is a little intriguing, would not the rate cuts and other activity, hopefully that will come in the budget, lead to something better, and there is also a liquidity gush from global central banks which is providing capital to a lot of Indian companies or some Indian companies, you don’t think all this adds up to much, I mean only half a percent better than this year, next year?
Let us go with your arithmetic, so you have had what 135 basis points of rate cut, how much of that has actually gone into lending rate. Hardly anything has gone into lending rate. So yes, you have a gush on liquidity sitting around, but nobody is being able to access that liquidity. Instead, Indian corporates are going abroad and bringing in European Central Bank (ECB) money and the Reserve Bank of India (RBI) is intervening both in the spot market and in the forward market and raising hedging cost. So we are going, most of the corporates, most likely are even going unhedged into the foreign market to raise money.
So, yes there is liquidity, yes there has been policy rate cut, but none of that has actually transmitted into credit growth, none of them were actually being picked up by Indian domestics. So until and unless that happens, it is very difficult to say that just because we have 135 basis points of rate cut that will get translated into ‘x’ percentage points of growth.
There is a 200 basis point fall in commercial paper (CPs) of AAA companies, and even AA, if you take from November onwards. So there has been some transmission, I agree that for outstanding loans it has not been very good, but some bond markets yields have fallen substantially?
Let us set aside the government bond market, I am sure you are going to ask me some questions on that, but let us stick to the corporate bond market. Yes, there has been some transmission and I am guessing that transmission over 3-4 quarters will get passed on to somewhat higher activity, somewhat higher working capital etc. and don’t really see that it could be more than half a percentage point. You have a very large fiscal impulse already in the economy, most likely we are going to head 3.8 this budget. They are going to take full advantage of the 0.5 space that the fiscal responsibility act provides them. Next year they will be consolidated, let us say they consolidate about 0.50 percentage point, you are taking out half a percentage point of stimulus when you are only depending upon what the impact of 135 basis points - not even sure full amount has been translated into corporate bond market to sustain the economy. I mean that is a very hard call to say all of this is going to give you more than half a percentage point of pick up.
From a market standpoint, there is now huge clamour for an income tax relief after the corporate tax cut came through in the budget. But there are reports indicating that instead of an income tax relief, there may be some spending stimulus as well, more funds allocated to infrastructure etc. Realistically, what are you expecting from the budget this time in terms of a stimulus?
This isn’t rocket science if you believe that there is a demand deficiency you do things to stimulate demand. If you think that the demand deficiency is right now and you need to stimulate demand then you take actions where you do not have to worry about designing new infrastructure project spending, you do not have to wait for whether or not the corporates actually going to use the corporate tax cut or whether households will actually use the space provided to them with the income tax cut.
You essentially go and cut Goods and Services Tax (GST), you slash GST by the amount of whatever space they use for corporate tax cut, you make it temporary, let us say you make it for 1-2 years, so that people have to spend that money now to avail of the 20-25 percent decline in prices and that has been something that we used in 2008-2009 very effectively. Many other countries including China continuously use that method. Rather than - we are using things that where the impact on growth depends entirely on how corporates are going to behave and how households are going to behave in a world that is very uncertain, that is not the right way to stimulate economy where the stimulus is required now.
What is the global backdrop in which all this happening, all the central banks have turned on their taps, should we expect something better, kinder from the global ambience?
Things don’t look very good right now. I mean if you look at activity data regardless of where you look except for Asia, China and North Asians that are tied to that supply chain, more or less activity data everywhere else is looking terrible particularly on the manufacturing IP side and there is a concern that this is already spread into consumer. But if you look at forward survey datas, all of them point to a reasonable pick up taking place perhaps starting from Q2 of 2020 and then going into the rest of 2020. So our sense is that you are probably going to see a much better turnout through the course of 2020 than at present.
If you compare the average of 2019 to the average of 2020, you are not going to see much pick up, but if you compare what has happened to the fourth quarter of this year or the first quarter of next year where we believe the global economy is going to bottom out, but from there is a reasonably large turnaround both in the US as well as in Euro area and of course in emerging market countries as well. So we are hopeful that there will be turnaround. Again we don’t think any of the G3 central banks are going to do anything except for keeping things on a very easy stance. So it is a reasonably good environment to be in perhaps starting from 2020 second quarter onwards.
What is your own view on the RBI’s Operation Twist? Two rounds of it that have taken place so far, do you see interest rates come down further and what is the impact that all of this would have on the money markets in the medium term?
The 10-year sold off because the RBI went against market views and did not cut. Now the RBI is trying to make up for that increase in 10-year rates by doing this thing called Operation Twist. You usually do Operation Twist or other countries have done Operation Twist when you do not have any more space left in standard interest rate policy. You don’t really have much space, you do Operation Twist with quantitative easing (QE) and yield curve control that Bank of Japan (BOJ) had etc. you don’t really have to do Operation Twist when you have short in case at 5.50.
I understand that this may be related to end year balance sheet upticks but generally, the upticks of this operation don’t look good. On Friday, you have an auction and the same bond is bought I am not saying in huge quantity, but the same bond is being bought on Monday and they have already done that twice.
Again you are giving a signal that those different objectives of the RBI keeping inflation down, keeping exchange rate stable and targeting the 10-year rate which has always been the problem and you and I have been talking about this for 10 years, that has always been the problem of having this multiple objective once again is showing up where the RBI is doing things which is very confusing to the market. I mean what exactly is the RBI targeting now? Is it inflation, is it foreign exchange (FX) or is it the 10-year rate?
We take on board your old report where you said the RBI shall not be the merchant banker of the government. That point is taken. We swung on one side when the government announced the market borrowing extra programme on December 20, 2016 or 2017 and punished the banks with mark-to-market (MTM) losses, we are making up for past sins, it is a cosmetic change, I take your point but just to finish – you were telling that you do a Twist when you believe that you don’t have space to cut rates, you think the RBI had space?
Yes. The headline numbers are going to look terrible and we know why. Food inflation has picked up, food inflation most likely will keep picking up. At least until February, it is going to look terrible. But we do know that core inflation is almost languishing and I think the RBI should have looked through. This increase in headline inflation and should have said – we understand this over the next six-nine months' inflation is going to come down, it is in there, it is in their forecast and as a result, we will continue cutting rates. So I am not exactly sure of the signalling that the RBI does.