The Hindu Business Line : ‘India can grow at over 7% despite economic slowdown’

Chennai, June 26 Central banks all over the world had kept their interest rates too low for too long, according to Mr Gerard Lyons, Chief Economist and Group Head of Research, Standard Chartered Bank.

And so when the reversal happens, it has to be done in a rapid way and in a shorter time frame, he said. He also pointed out that central banks have been quick to respond to commodity price increases because they reflect in the headline inflation numbers. Asset prices had been rising strongly over the past few years, but despite a growing world economy, that didn’t lead to a tightening policy bias.

Mr Lyons said that India was in the midst of a ‘cyclical’ slowdown in the economy, triggered by factors such as rising commodity prices and interest rates, but could still manage a 7 per cent-plus growth. He held the view that India is, in fact, not growing to potential and could easily grow at 11-12 per cent, if issues such as infrastructure bottlenecks are sorted out.

While endorsing the Reserve Bank of India’s recent rate hiking measures, he said that he expected a further significant tightening from the RBI. He said he expected another 50 basis point hike in repo rate, a 100 basis point hike in reverse repo rate and a further 25 basis point hike in CRR. He said the RBI had to focus on curbing aggregate demand and tackle wage pressures. He said the issue was one of moving from ‘strong’ to ‘sustainable’ growth rates.

Bullish on economy

He said he still remained bullish about the world economy – but not for the next 18 months. This is a cyclical slowdown that we are experiencing, he said. He forecasts global oil prices to eventually ease off at current levels. He attributes the recent spike to supply related factors such as strategic buying by the US and China and refinery capacity constraints, apart from speculative buying by investors.

Asked about the view on funds flowing into the emerging markets, he said that foreign funds had become a bit risk-averse and this may dampen flows in the short run. But these will return at some stage, he said.

Talking about the credit crunch globally in the wake of recent economic crises, Mr Lyons offered a rather ominous prognosis. Taking recourse to a Churchillian expression, he said, “It is not the end. It is not even the beginning of the end. It is the end of the beginning.” He said that in earlier economic downturns, the financial sector was in better shape at the beginning. This time, with the sub-prime woes and other problems, the financial sector was going into the downturn in a stressed state. He said that the jobs data in the US would hold the key to get an idea of the how the economy was performing there and predicted that there was little chance of the US Fed hiking rates further.

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