the first time in six months, questions are being raised
on the macro-economic fundamentals of the economy, with
questions being raised on the robustness of the economy.
A CNBC-TV18 shares experts' views with domain-b.
the scare on interest rates following the CRR hike and
yesterday the industrial growth numbers surprised almost
everybody without exception. Abheek Baruah of ABN
Amro and Robert Prior-Wandesforde of HSBC Holdings
give their perspective to the industrial output numbers
that came out yesterday.
feels that November's industrial production growth may
bounce to double digits. According to him, industrial
output numbers in November would be the key and that holiday
for Diwali was the main cause for the low October numbers.
He expects another 50 bps hike in reverse repo rate in
H1CY07. He further adds that US slowdown could knock 50
bps off India's GDP growth.
believes that adjustments due to the Diwali holidays may
have caused industrial output numbers to dip. He feels
that there is nothing to suggest a dramatic slowdown.
He mentions that it is premature to conclude that cap
growth is slowing down.
is your sense after looking at those industrial numbers,
do you think it's just a blip, which will get revised
or is there genuine reason to be concern?
Baruah: That's pretty much my sense. One can consider
looking at it from two perspectives. One is to question
the veracity or the accuracy of the data, and if you benchmark
it against something like the 'purchase managers index'
for manufacturing, clearly there seems to be a disconnect.
The purchase manager's index for October shows virtually
no signs of any softness.
I would sort of have some reason to doubt the accuracy
of that data. Number two; even if they were to sort of
take the accuracy for granted, there are a couple of reasons
why this could have happened. One was the fact that in
October 2005 you saw a sudden uptake in categories like
capital goods and consumer goods and the base effect could
itself pull it down. Number two, one must recognise the
fact that October was the Diwali month and these are sort
of production numbers that we are talking about.
one possibility is that there could have been some sort
of adjustment in inventory in October after a sort of
a production built up to the Diwali month. There also
could have been a sort of plant closure for a couple of
days with dry production down for a bit. So I think there
are enough explanations in both senses to explain this
in on that- is it looking like a blip? What's more concerning-
the numbers that are coming now or if we do not see a
bounce back in November?
Wandesforde: I think the key probably is the November
data. I would very much agree that the key factor as far
as the weakness in October was concerned was the Diwali
holiday, which meant there are fewer number of working
days in the month. Typically you see a noticeable affect
in the Diwali month- industrial production typically falls
in that month and it bounces back very strongly in the
would expect to see exactly the same thing this time as
well. In fact I wouldn't be surprised to see industrial
production back at a double-digit growth rate in November.
So I don't think there is any particularly good fundamental
reason to believe that industrial production is slowing.
We are still looking at a very robust growth story indeed
fueled by extremely low interest rates.
that there is no revision downward or upwards from the
CSO (Central Statistical Organisation) and even if things
were to slow down, would they slow down so alarmingly
in just a month or do you actually see it as a gradual
Baruah: From the sort of whatever other numbers
that we track, there seems to be nothing to suggest very
dramatic slowdown. In fact I would expect the numbers
to improve from November onwards.
me again emphasise that the purchase managers' index,
which we track, is actually historically proven to be
a very close correlate of the IIP. We have the numbers
for November and that shows very healthy growth. There
are other problems the problem of input cost and
so on but certainly no problem in top lines or
you say then that even though there isn't a big hit because
of what is happening with external demand, higher local
interest rates, consumer spending softening are just getting
into a softer phase in terms of industrial growth for
Baruah: I am not entirely convinced that consumer
spending is softening that drastically and I think there
is a fair bit of momentum in the system. Of course external
demand remains a problem.
have been far more leveraged on global growth and if the
US does moderate, it would have some kind of transmission
I think you will sort of see that really beginning to
show in the numbers both in terms of sort of corporate
topline as well as broader macro numbers only in the second
half of calendar 2007, and not before that. This is really
an aberration and I wouldn't take this as the first sign
of a sustain slowdown.
other big concern in our market is the prospect of interest
rates going up quite a bit. What is your own sense of
what the Reserve Bank is trying to do and by how much
could rates inch up in the system out here?
Wandesforde: I think the first point is that interest
rates are very low. If we look at real short-term interest
rates, we take the RBI's reverse repo rate and remove
from that CPI inflation, which is now running close to
8 per cent, then we get a highly negative real interest
think that's really what is driving a lot of demand out
there. The key issue seems to be whether supply can keep
up with demand I suspect they can't. That's why
we are beginning to see signs of excess coming through.
against that kind of a background, I would be looking
for the Reserve Bank to continue to tighten its policy.
I suspect there will be still fairly cautious inner approach
but I will be looking for say another 50 basis points
sort of 0.5 per cent on the reverse repo rate during the
first half of next year despite the fact that the US economy
will continue to slow from here.
concerns on the questions raised about the world trade
cycle and whether there is collateral damage for us as
Wandesforde: I think that the world trade cycle
is now turning down. I think the US is slowing and other
countries around the world are beginning to respond to
that. So I suspect that would continue from here and I
think India will be impacted by it but certainly won't
be impacted as hard as most other Asian countries.
it certainly shouldn't be in the frontline as far as the
impact is concerned. I would anticipate that the US slowdown
could knock something like 0.5 per cent of Indian GDP
growth, which, in the context of the recent growth rate
of 9 per cent plus, is not going to make a huge difference.
I think the economy would continue to grow above its long-term
trends for the coming months and the coming years.
in the equity market are now debating since yesterday
whether they should go light on sectors like capital goods,
two-wheelers and cement in the light of the industrial
growth numbers. Would you say it's premature and too hasty
to draw conclusions like that?
Baruah: I think it is premature. There could be
other problems input costs are a problem, excessive
completions is a problem in some segments like two-wheelers
but that's a separate issue.
terms of sales momentum or growth momentum, I think it
is a little premature. There seems to be enough signs
of the consumer boom sustaining, so I would really think
it's little premature.