Aurodeep Nandi on why Nomura more concerned about 2023 growth prospects
Last Updated: Jul 15, 2022, 03:56 PM IST
“What is happening now is a long lost catch up of the service sector that was missing from action for a long time, plus, the lag effects of easy financial conditions. The government has focussed a lot on capex and bank credit growth is slowly picking up. So, in the near-term, growth looks fine and we should expect a strong momentum in the next GDP print or so.”
We expect the US will enter a recession from Q4 of this calendar year and that is primarily because you have got the Federal Reserve that has been very aggressive. It is planning to hike rates quite a lot, in fact, our new projection now is that the next rate hike is going to be of as much as 100 bps so there is going to be a lot of tightening of financial conditions in the US,” says Aurodeep Nandi, India Economist& Vice President, Nomura.
Nomura recently cut India’s GDP forecast for 2023. What are the reasons for the same and what is this dichotomy about the 2022 target being maintained but that for 2023 being cut?
For 2022, this looks fine and so people are going out to restaurants, going out for vacations. If you look at the Q1 CY2022 GDP number, the
one sector that was lagging pre-pandemic levels is trade, hotels, transport and communication around 6% below pre pandemic level, all the other sectors are doing above pre pandemic level.
I guess where we start getting concerned is 2023 where we have lowered our GDP growth projection from 5.4% to 4.7% and what is driving that primarily is our forecast of a global growth slowdown.
We expect the US will enter a recession from Q4 of this calendar year and that is primarily because the Federal Reserve has been very aggressive about controlling inflation. It is planning to hike rates quite a lot. In fact, our new projection now is that the next rate hike is going to be as much as 100 bps. So there is going to be a lot of tightening of financial conditions in the US.
s a result of this, not only do we foresee the US being in recession, but we also foresee a recession in the EU, South Korea, Australia, Canada, Japan, and the UK. A bunch of economies, especially in the developed markets, are looking at an elevated risk of recession next year. So, global growth is likely to slow down.
Now how does this affect India?
It affects India in two ways; one is that there is going to be an inevitable slowdown in exports. If you look at the last two merchandise trade numbers, you will see that export growth has already started slowing down.
Plus, investment growth has started to falter at a time when global growth is slowing down. The primary driving factor is that global growth is slowing down but apart from that, it is very important to understand that the impact of inflation is hitting consumers. There are people who are complaining that the prices are too high, there is anecdotal evidence of people shifting to cheaper brands and curtailing consumption growth. There is the pandemic shock to their incomes plus the inflationary shock is coming in.
Consumption growth is slowing and for some reason, we have not seen private capex pickup significantly in the past few quarters, while we are concerned about the medium-term growth slowdown.
The rupee is almost at 80 against the US dollar. What is that going to mean? In the short term, we might be talking about importing inflation but on the other hand, it is good for forex reserve build up, it is good for pharmaceutical and IT companies in that sense and all of this is ahead of the big US Fed action next week. Is that the big cue now?
There are two factors at play when one is looking at the rupee; one is of course what is happening globally and that is the key driver going forward but the other thing to consider is also India’s current account deficit.
One of the things that we are seeing is that export growth is slowing but the import growth has been very sticky. We are importing copious amounts of crude oil, coal, gold and what this is doing is India’s merchandise trade deficit has already hit record high as of June. We had beat the May high and are seeing a widening of India’s trade deficit.
In fact, for FY23, we expect the current account deficit to be around 3.3% of GDP. Now for an economy like India, when the current account deficit is this high, there are obviously concerns about how we are going to fund it. So, people start thinking that the portfolio investment is going out;, so you got to rely a lot on FDI and ECBs somewhat. So, a funding concern is building up in terms of India’s current account and that is one of the reasons which is driving the weakness too.
I do not think that there should be a trade-off between tackling inflation versus external account because at the end of the day, the extent to which a rupee or any currency reacts is not just about the global factors, but it is also faith in the domestic macro fundamentals, how stable the inflation framework is and how well the central bank reacts to it. How have you tethered your fiscal consolidation? I guess those fundamentals should be compromised.
So, I still feel that inflation remains elevated, the RBI needs to come in and tackle inflation. It has already done several rate hikes. We expect it to raise terminal rates to 6% by February 2023. So, the inflation fight should happen regardless.
What is the sense that you get when it comes to our own forex reserves which have lowered with the movements in currency which is now in a sniffing distance from the dreaded 80 to the greenback. How is this likely to impact the overall scheme of things? Are you expecting any intervention from RBI?
The Reserve Bank has already started intervening on the currency explicitly and, we had measures announced a week or so back to encourage capital flows to ease conditions for people to essentially bring in capital from outside.
All these actions seem to suggest the first or the second lines of defence that emerging markets typically have against a sharp depreciation of the currency. I guess the RBI is already in the battlefield.
You mentioned that reserves are slowly going down; that indicates the ammunition is being used. On the reserves side yes, the import cover has gone down but one thing we observed is, if you take short term debt and take the current account and add them up and see how much it is as a proportion of reserves, our reserve cover now is much better than the situation in 2018 and 2013.
It is important to consider the fact that yes, there are pressures on reserves, but we are in a much better off situation than we were in previous times of currency stress. But that apart, I guess that the RBI has said this time and again that we are not in the business of controlling the level, we are in the business of controlling volatility and in times like these, one would expect more measures to invite capital flows in.
As far as the rate hikes are concernedIndia has a flexible inflation targeting framework which essentially means that one should react to inflation and growth and not to any broader factors. One cannot target currency using rates and I think RBI is likely to remain steadfast to that mandate.