GDP growth to be 8.2%

Mahesh Vyas, managing director & chief executive officer, CMIE, said the economic growth forecast has been reduced from 8.7% to 8.2%.
 
"That is essentially because we've brought down our forecast for the industrial sector. We have been bullish on the Indian economy in this year because we believe the investment cycle has been very robust. A lot of investment plans have been announced and many are scheduled to get commissioned. As these get commissioned, industrial production is expected to rise but what has happened is the Sept - Oct shock that came in - it was unexceptionally large, which will hurt the growth process in the 3rd and 4th quarters."

Lots of foreign brokerages have been scaling down the GDP forecast for FY10 between 5.5 -6%. What’s the CMIE view and how would you support it?

Vyas: We don’t have a forecast for FY09-10 as yet. We are working on FY08-09 and we have reduced that from 8.7% to 8.2% now. We are also seeing that there will be a decline in the GDP growth in the December quarter, but there will be a recovery in the March quarter. We don’t have estimates as yet for 2009-2010.

Why did you bring down your own assessment and how come it is still so much higher than the others, even the government’s?

Vyas: We have lowered our GDP forecast from 8.7% to 8.2%, essentially because we have brought down our forecast for the industrial sector. We have been bullish on the Indian economy this year because we believe that the investment cycle has been very robust. A lot of new investment plans have been announced and many are scheduled to get commissioned and industrial production is expected to rise. As these get commissioned, industrial production is expected to rise but what has happened is that the September and October shock that came was exceptionally large. This has hurt the growth process in the third and fourth quarters. There have been many large projects whose commissioning got postponed by a few months. This hurt the acceleration in growth in the third and fourth quarters and that is why we lowered our growth rate forecast for the industry from 8.3% to 6.3% in FY08-09.

How come you got a better assessment on the growth of the economy as compared to the government? The government is saying 7.5% and it seems they are counting a lot on agriculture.

Vyas: The forecast for agriculture is 3.2%, which is a shade lower then the average in the last three years. The government has been unusually cautious in the forecast this year and it has its own reasons to be cautious. But our bottoms-up approach of looking at individual crops and individual sectors and companies shows us that the industrial sector is doing very well. The government does not exactly have a machinery to monitor the new investment coming up. Its assessments are more from a macro economy perspective that often leads forecasters, including the ones in government, to show that the economy will slow down. But if you look at the unique capex database that the CMIE has, it shows larger capacities coming up. We have strongly disagreed with the index of industrial production figures. We have even disagreed with the wholesale price index, and if you look at the alternate numbers we get, they are completely different. How do we reconcile with the fact that the IIP shows a 4% growth in production in the first half whereas the sales of companies show more than 20% increase? Even when the two parties are accounting exactly the same output, one shows a robust 20% increase, while the other shows a meagre 4% increase. That’s the basic difference.

Is it a worst-case scenario that the industrial production growth could actually be in negative terrain anytime over the next couple of months, given the customs collection, electricity output and export data that we have for October? Could you make a case for the negative IIP growths either in this month or the next?

Vyas:  I think it is a very difficult question to answer whether the index of industrial production data collection machinery is still weak. Adding to that, there have been extraordinary problems in the month of October. There have been some concerns about hydel power generation because the reservoir levels have been low and exports are reported to be low. There have been genuine problems in the month of October in terms of trade payments also. So, I expect October to show pretty bad numbers as far IIP numbers are concerned.

Are exports going to be that big a concern because economists are now saying that they could be the weakest link?

Vyas: That certainly is an area of serious concern and the numbers given out by the Directorate General of Foreign Trade (DGFT) says that October exports were actually down. It is an indication of what’s likely to come and there is already a noise about textile exports suffering because of weak US markets. We have only small upsides like the rupee depreciation, but in general, the outlook for export is depressing right now. The good thing for the year as a whole is that the first half is very good, but the second half is correspondingly quite bad.