Unseasonal rain and oil production cuts pose a new challenge to inflation and the overall economy. At the same time, considering the retail inflation based on Consumer Price Index is still over the upper tolerance level,  there is a strong possibility of another round of interest rate hikes.  

How is India’s economy likely to fare in the coming quarters and would the RBI’s Monetary Policy Committee meet be favourable to a resilient economy.

In this podcast, Aditi Nayar, Chief Economist, ICRA speaks to businessline’s Shishir Sinha on India’s Macro Economy, the various economic indicators, and the direction in which India’s growth is likely to take in the coming months.

(Host: Shishir Sinha; Producer: Siddharth MC)

Q: How do you read the PMI manufacturing?

Ans: Do you know the PMI manufacturing numbers give us a reasonable indication of the momentum or sometimes their correlation with the other high frequency indicators may not be very good, because the construct itself is quite different? Also, the PMI is basically a survey, which is conducted by a certain set of participants.

And what we understand is that the responses have an equal weightage, no matter how big or small the company that the respondent is with. Anyway, so I would not worry too much about the quarterly growth being a little lower than last quarter. I think what’s more important is that the momentum is getting maintained. And when we look at the other high frequencies as well as a bit of a mixed trend, some things are getting distorted in January because of the base of Omicron.

There are other things that are getting distorted views of the very heavy rainfall that we’ve seen in March. Overall, we expect that in Q4 of FY 23, we are probably going to end up dropping a real GDP growth of around four and a half to 5%. So a very tiny bit better than what was there in q3.

And margin pressure was also lower in that quarter. When we look at how commodity prices moved over the last five quarters or so, basically, as the vaccine started becoming more available for COVID. We saw that commodity prices had started an uptrend and then we got into Omicron and the supply shortages, then we got into the Russia-Ukraine war. So because of all of these reasons, we found that in q1 of FY 23, commodity prices were very high. And that is something that started to have an impact on margins, particularly in q2, and a little less so in q3 as a model, the prices have actually started correcting from July onwards. So what we are now seeing in the news is that some companies are in a position where they’re being able to offer some price benefits to their consumers as well.

Again, this may not be across the board, it may not be every company or every sector, but some using of commodity prices should be there which would have had built in q4 and definitely in the current quarter commodity prices input prices in many sectors will be much lower than where they were a quarter ago. And that is something that should support sentiment as well as the volumes are the two things we were discussing the unseasonal rain in March.

Another issue, which was just announced yesterday is cut into production for the next few months. And at the same time, we are seeing unseasonal rain, which is affecting food and production. How do you see these two factors are going to affect inflation in a, you pick the exact two things that are now risks so the inflation is actually going ahead for FY 23.

Our forecast is that the CPI inflation was 6.7%. And our baseline expectation for FY 24 is that it will drop down to 5.4%. So a reasonable about the moderation but still fairly far away from that much wanted 4% or medium-term target. Now looking ahead, these are the two factors that are there.

Firstly, the largest unseasonal rain in March. What is the impact of that on our report positive is that at least the reservoir levels have been replenished to some extent. And that gives us some insurance going into the next season. And we’re not quite clear how the El Nino will pan out and what impact that will have on the monsoon known and on food output after that. So clearly, I would say that the risks to food inflation are only to the upside that it will be higher than what we’ve been selling and then on the crude oil side things are a little more complicated because As our crude oil prices tend to be quite volatile, in fact, when we were doing our baseline forecast for FY 24, we worked with a pretty wide range is where we are today, effectively, where the lack of clarity or you know, where we’re forecasting becomes difficult, from the crude prices to the macros is that we don’t know whether the government will cut duties.

In the event that crude looks like it’s going to be higher. And therefore, that is what will end up impacting the CPI inflation. Because ultimately, as far as the CPI basket is concerned, crude doesn’t enter it, what enters the CPI basket is petrol and diesel and the other are downstream items.

So therefore, what the government chooses to do if crude oil prices, jump, and then after that, you know, what happens to the CPI inflation? And then what is the MPC reaction that is a little harder to predict.

Q: The important thing is that we haven’t seen price revision in petrol and diesel since last May. And considering the political consideration, it is expected that there will be no further revision as of now. So in that situation, do you see some kind of built-up increases saved coming month after two or three months, then, and that will have a bigger impact on the inflation?

Ans: We can’t rule that out at this point in time. So let me put it another way, crude oil tends to be one of the most volatile thing, factors for macro economists like me to predict. And it’s volatile in many years in both directions.

So while 83 or $85 per barrel, I would say for an economy like India, it’s not low, but it’s not terribly high. And I think that’s a level that as an economy we have to be able to live with. Now, if it goes to 95 or 100, and stays there sustainably.

Let’s see what the government’s reaction is. But those are levels we’ve seen in the last year as well. So the Nord levels that are unheard of, okay, and we do see pullbacks as well, from the higher levels as demand supply sort of readjusts and even now, yes, we are no longer talking about recessions in many parts of the world.

We’re still looking at anemic growth in many parts of the world and how strong China’s demand or turns out to be over the course of the year. Is it still a question mark?

Q: We saw the fiscal year 23 started with a bang with all time high collection and ended with the second highest ever collection. is that is it because of compliance and more of compliance and less of consumption or combination of both equally divided?

Ans: You know, my view is that it’s three things, it’s better compliance, better volumes, and better. Hi, I wanted to bring inflation into the latter portion. So that’s why I just focused on the two things at this moment. But that’s in Wait, no, we did have a lot of price rises over the course of last year.

So it’s it’s I would say it’s all three factors that are pushing on the GST collections. And we expect that for the next month, though, April 2023 GST collections will definitely be a sequential improvement over the march number that we just got. Although I’m not quite sure how much of a growth we will get over the April or 22 all time high.

But I am very hopeful that we will end up with a very good number for April 2023 as well.

Q: So the three factors consumption, compliance, and inflation. So that what percent is the contribution of inflation in overall GST collection? What would be your take?

Ans: I don’t have a firm answer to that. And I think whatever I say would be conducted at this point in time. But this is similar to what we see on the export and import numbers as well that we have a combination of volume and inflation, which is driving the export and import numbers and the GST collections we have this third factor of you know, increased compliance as well. And now it will be quite interesting to see in fact in FY 24, where volumes should be better.

Inflation should be at least moderated as compared to last year And we’ll have to see how much further compliance can improve. And possibly between these three factors, we may end up with a reasonably good growth in the GST collections, but it may not be as high as what it was last year.

Now coming to another high frequency indicated that is a core sector growth we have seen in the month of February that was down on a sequential basis. So, how do you read that, because the industrial number for the same month will be out on the 12th of this month. So how do you read that core sector number?

See, the core sector number did moderate and in fact, I believe it will moderate further in March because both are working toward for Coal India, work you’ve seen in the filing. There, the growth is lower in March as compared to February, at electricity we were already seeing over the course of the month, with heavy rainfall in March 23.

On a base of sore heatwave in March 22, we saw very low growth or you know, even periods of contraction in the electricity demand in that month. So, I would say that, in fact, core sector growth is going to moderate further in March as compared to February. But the non core sectors, you know, we’ll have to see how things pan out over there.

So overall industrial output, I would imagine is going to remain in the low single digits IIP growth is probably gonna remain in the low single digits in this period. But of course, you know, there are challenges with the IIP. It’s a very old base, it is not able to pick up production, which is happening in newer centers and newer production facilities.

So we have to sort of keep that in mind while assessing the IIP and while making inferences from that to the GDP numbers. Okay, now, all eyes on the MPC meeting now, which has started today. And that will continue for two more days, and then we will have a resolution.

Q: There are various commentary on that one set of economists are saying that we may not see a hike another set of experts are saying that we may have another 25 basis point hike and then there will be a pause. How do you see that?

Ans: Our view is that we got two inflation trends after the last MPC meeting that are really quite unpalatable. We got the January inflation coming in at a surprising six and a half percent, and a very marginal correction to 6.4% in February. So the optics of inflation don’t look very good at this point in time.

Our forecast for March CPI is that it’s going to be 5.9 to 6%. So the average CPI inflation in q4 is going to be much higher than what the MPC had projected. And therefore we think that a narrow majority of the MPC members are likely to vote for another rate hike. It will not be a unanimous decision, given what we read in the minutes of the last MPC meeting. But we do think that there’s a high likelihood that we will end up with one more 25. bps rate hike on Thursday.

Now looking ahead.Clearly, like I was saying earlier, the risks to inflation are to the upside.But we’ll have to see how the growth inflation trajectory evolves going ahead. And we believe that a pause, an extended pause may be warranted.

Q:So if we take another round of hikes that means, say 20 basis points or 25 basis point that will take two to 275 basis points, don’t you think that is going to affect sectors like real estate or the consumer durables?

Ans: Oh, it definitely would. And in fact, that’s the reason that I’m saying that after this rate hike, which we’re anticipating on Thursday, the MPC showed sort of watch what is the impact of the cumulative rate hikes on different sectors are not going for more rate hikes in a hurry.

Q: But the real concern is core inflation which is still above 6%. We do not see any kind of moderation in that. That is another concern area for MPC.

Ans: Let me offer you a slightly different thought. Or if we look at what has happened with some services over the last year, after a couple of years of the pandemic, probably there are some service providers who have increased prices in one big shot. And that is something that has pushed up core inflation and it’s going to remain embedded in the base for a full year. But the annual increment, which happens in FY 24, may be of a smaller magnitude than what we saw in FY 23, which was a catch-up. Therefore, possibly once that, you know, one year of this of last year’s increases behind us services, inflation may not actually be as high in FY 24 as what it was in FY 23.

Q: You is that you already talked about that q4 number which is between four and a half percent. And if I asked you about the FY 24, what kind of growth scenario you are looking at?

Ans: So we are looking at two for GDP growth being between four and a half to 5%. And if we presume that there will be no revisions to one q2 and q3 data, then that leads us to a full-year growth estimate of 6.9% for FY 23. From that, we’re expecting a moderation to 6% and FY 24, on the back of the external sector risks as well as a normalizing base. If El Nino does transpire, then we’re looking at a potential downside to GDP growth of about 50 basis points in FY 24. And what we believe is that there will continue to be pockets of resilience in domestic consumption and that services will continue to be prioritized over goods.

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About the State Of The Economy podcast

India’s economy has been hailed as the bright spot amid the general gloom that seems to have enveloped the rest of the world. But several of its sectors still stutter about even while others seem set to fire on all cylinders. To help you make sense of the bundle of contradictions that the country is, businessline brings you podcasts with experts ranging from finance and marketing to technology and start-ups. Tune in!

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