Industrial production has contracted for the second month in a row, shrinking by 4.3 percent, according to the latest data released by the Central Statistics Office (CSO). Additionally, gross domestic product (GDP) growth in the second quarter could sink below 5 percent, according to people in the government familiar with the matter. Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, shared his views on the state of Indian economy in an interview with CNBC-TV18.
“We are increasingly looking at a 5.6 percent number because not only the index of industrial production (IIP) number bad but our own activity indicator is slipping every month. So clearly, the September quarter GDP numbers are going to be weak. Thereafter, you could see a recovery on base effects but then clearly the bottom is getting longer and deeper,” he said.
The Reserve Bank of India's monetary policy committee (MPC) has cut the repo rate during its last five meetings and Gupta feels that another reduction is likely on the cards during the MPC's December meeting as well as in February next year.
“We are looking at the Reserve Bank of India cutting 25 basis points on December 5 and then cutting 15 bps in February. Clearly, inflation is going to be higher — just not because of the onion price hike but because the base effects will turn against you this year at least in February but presumably because it is really base effects more than anything else that will drive inflation. We expect the RBI monetary policy committee to look through it.”
On fiscal deficit, he said: “We are looking at a fiscal deficit target of 3.8 percent, so a 50 bps slippage and this also assumes that states rundown their treasury bills investments to some extent to fund their portion of the corporate tax rate cut."
He added: “Right now we are all waiting for the government to announce the funding plan because prima facie if we look at the fact that the RBI is cutting, bond yields should go down if the government comes up with a suitable funding plan which is not very difficult to do,” he further mentioned.