We see India growth slowing to 7.2% in FY17: JP Morgan’s Sajjid Chinoy

Despite wide expectations of a global economic slowdown post Brexit, Sajjid Chinoy, Chief India Economist, JP Morgan, sees less scope for monetary stimulus by central banks globally. Domestically nothing much is expected to change and recovery will happen with resolution of non-performing assets and leverage in the corporate sector. Excerpts from an interview:

How do you see India’s GDP growth panning out amid global events?

Our growth forecast for FY17 is modestly lower, at 7.2 per cent, from the 7.6 per cent that printed in FY15. We estimate that the positive terms of trade shock from the collapse in oil prices added a full percentage point to growth last year. But that’s a temporary one-time windfall, which goes away in FY17. Offsetting that will be higher growth on account of a strong monsoon. We shouldn’t expect too much from exports given global growth risks are skewed to the downside after Brexit. All told, we expect a modest slowing in FY17.

Can one be certain that monsoons won’t disappoint?

One can never be sure, but so far so good. Both the quantum and the spatial distribution seem to be adequate for now. But July and August are crucial months, so let’s keep our fingers crossed. A strong monsoon will be important to stoke some rural demand and should also help cool off food prices later in the year, even though there is no easy correlation between the strength of the monsoon and food inflation. That said, coming on the back of two droughts, good rains and production should have a calming influence on food prices.

When do you see recovery happening in the Indian economy?

I think we have already seen a recovery of sorts last year both in urban consumption and public investment. Consumer durables have done well, as manifested in auto sales and strong credit growth to households.

We have also had some recovery in capital goods production on the back of higher capex spending by both State and Central governments in FY16. But space to expand capex spending further in FY17 may not exist given the Pay Commission liabilities. It is therefore crucial for private investment to pick-up soon.

In the manufacturing sector, this needs stronger demand. In the infrastructure sector, this needs a resolution of corporate leverage and bank NPAs.

Do you think the worst is over on the NPA front?

I think NPA stress may continue till the end of FY17.

A lot will depend on the growth and commodities trajectory, and what happens to stalled projects and implementation bottlenecks on the ground.

It’s important we recognize the problem fully and then resolve it as quickly as possible, even if it means taking some hit up-front. Because unless the debt-overhang and perceptions of capital inadequacy are alleviated, it’s hard to imagine banks’ risk aversion to growing their balance-sheets will abate.

You believe that there is less scope for monetary stimulus by central banks globally. Why?

Despite being on hold yesterday, we expect the Bank of England will cut rates by another 50 basis points in the next few months and initiate quantitative easing later this year.

Bank of Japan may consider helicopter money involving fiscal-monetary combination and European Central Bank will also do more QE.

With the Fed rate hike postponed, other central banks may ease further. But the larger message is that monetary policy appears to have run its course.

With term premia so low around the world, the efficacy of more monetary stimulus is questionable. We need to go back to doing the harder work of structural reform in various countries around the world.

Do you think it will be positive for India?

More monetary stimulus is not necessarily positive for India because we do not want boom-bust volatile capital flows. We need high quality money in terms of foreign direct investment flows. Also, to the extent that more monetary stimulus drives up commodity prices, that’s not good for inflation dynamics in India.

What is your view on inflation?

We still expect inflation to be in the 5-5.5 per cent range for FY17.

Much will depend on what happens to food inflation later in the year and whether core inflation softens from the 5.5 per cent level it has been stuck at for the last 18 months. Getting to 5 per cent by March 2017 won’t be trivial, but neither is it impossible if we manage our food supplies well.

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