2021 will be an important year from the point of view that as the economy recovers, very gradually will the financial system be up to it in terms of assisting this kind of growth, says Madan Sabnavis, Chief Economist, CARE Ratings. Excerpts from an interview with ETNOW.
Are you taken a little aback by the kind of dire forecast that we have had for January? IMF Chief Economist Geeta Gopinath is saying that there is a possibility of a significant downward revision, that growth concerns remain and fiscal slippage risk continues to be high.This was quite expected because during the course of the year, almost all agencies including the Reserve Bank of India have lowered their forecast for growth in India. We should remember that we all started off with the budget which spoke of GDP growth at over 7%. That came down to 6% and now we are really talking of a growth around 5%. So, it is not really surprising that IMF is also going to downgrade the growth forecast
In fact, I am surprised they are doing it in January and not in December itself. But probably, they have their own processes when they review the economy. For this particular financial year, it does not look likely that there could be a significant recovery. Most of the upward movement in the growth rate in the third or fourth quarter is going to be caused more by the statistical influences rather than real growth being seen in terms of higher consumption or any kind of revival in demand. So this was something expected, not really surprising and I tend to think that it will move towards the 5% mark from 6.1% which they had earlier.
She has talked about how we may see continued slow growth for a while given the fact that the financial system continues to be fraught with risks and the process to fix NPAs is not fast enough. Also, rate transmission remains slow. Would you call this catch up commentary or is this a signal for what is to come in 2020?
It is a signal because what we have seen about the financial crisis is that it started off as a PSB issue, spread to the private banks and then to the NBFCs and now to the cooperative banks. The picture we are getting is that the financial sector is not out of the woods and there are still problems in terms of the NPAs. -- recognition of NPAs, capital issues for the public sector banks and so on. In this situation, the signal given by IMF is quite real because we are saying that currently we do not have too much demand for funds. I do not think that it is a major issue in terms of funding for corporate India.
But let us look at the situation when the economy gradually recovers and there is a demand for funds especially for investment. Is the financial system really geared for it? As of today, the answer is probably we are not really sure about it. We need to wait till March to see what the NPA numbers of the banking system are. We need to see how the NBFCs have gotten through the crisis.
We are already seeing the CP market being affected on account of the NBFCs being crowded out from here. Once we get the financials piece in the puzzle in place, only then can one talk of acceleration in growth.
2021 will be an important year from the point of view that as the economy recovers, very gradually will the financial system be up to it in terms of assisting this kind of growth.
The $5-trillion economy target is in place. According to the IMF chief, we will need 8-9% growth to achieve that by 2025?
Absolutely. This $5 trillion is something which we should keep out of our minds because it is going to be quite a long time before we reach this particular mark. When we are talking in terms of how do we get to this particular number, we need to have nominal growth in GDP reaching around 13-14% consistently for a period of five years.
Currently, we are talking of inflation in the region of 4%, we are talking of growth in the region of 5%. So, our nominal GDP growth is less than 10%. It is going to take at least six to seven years to reach it. Again, I would say what IMF has pointed out is quite right. We need 8-9% growth in real GDP, which we cannot see happening in 2021 or even 2021-22. It is going to be a bit of a stiff climb towards that particular target of $5 trillion.
She also expressed her concerns over the slow pass through of rate cuts that has been seen in India. How would you react to that?
I would have a slightly different view because I think when the RBI lowers the repo rates, that is a kind of a signalling rate and the way in which banks react, should be their prerogative. They have to look at their assets and liabilities, they have to see what are their costs and in terms of their incomes.
More important is the risk perception. That is how you bring about a change in the actual lending rates. It is going to be a mismatch between what the government and the RBI want to do in terms of signalling lower interest rates and how the banks are going to react, because today we are talking of a credit environment which is still definitely more on the risky side. Banks will be a bit cautious because the NPA hangover has been quite severe.
We are also talking in terms of the SMEs which seem to be the next burning point in terms of NPAs. The banks are being cautious in terms of the transmission. We are also seeing that deposits, financial savings are being affected. It is going to be a delicate balance between the two. Banks should not be hurried to bring about this kind of transmission change.
Are you taken a little aback by the kind of dire forecast that we have had for January? IMF Chief Economist Geeta Gopinath is saying that there is a possibility of a significant downward revision, that growth concerns remain and fiscal slippage risk continues to be high.This was quite expected because during the course of the year, almost all agencies including the Reserve Bank of India have lowered their forecast for growth in India. We should remember that we all started off with the budget which spoke of GDP growth at over 7%. That came down to 6% and now we are really talking of a growth around 5%. So, it is not really surprising that IMF is also going to downgrade the growth forecast
In fact, I am surprised they are doing it in January and not in December itself. But probably, they have their own processes when they review the economy. For this particular financial year, it does not look likely that there could be a significant recovery. Most of the upward movement in the growth rate in the third or fourth quarter is going to be caused more by the statistical influences rather than real growth being seen in terms of higher consumption or any kind of revival in demand. So this was something expected, not really surprising and I tend to think that it will move towards the 5% mark from 6.1% which they had earlier.
She has talked about how we may see continued slow growth for a while given the fact that the financial system continues to be fraught with risks and the process to fix NPAs is not fast enough. Also, rate transmission remains slow. Would you call this catch up commentary or is this a signal for what is to come in 2020?
It is a signal because what we have seen about the financial crisis is that it started off as a PSB issue, spread to the private banks and then to the NBFCs and now to the cooperative banks. The picture we are getting is that the financial sector is not out of the woods and there are still problems in terms of the NPAs. -- recognition of NPAs, capital issues for the public sector banks and so on. In this situation, the signal given by IMF is quite real because we are saying that currently we do not have too much demand for funds. I do not think that it is a major issue in terms of funding for corporate India.
But let us look at the situation when the economy gradually recovers and there is a demand for funds especially for investment. Is the financial system really geared for it? As of today, the answer is probably we are not really sure about it. We need to wait till March to see what the NPA numbers of the banking system are. We need to see how the NBFCs have gotten through the crisis.
We are already seeing the CP market being affected on account of the NBFCs being crowded out from here. Once we get the financials piece in the puzzle in place, only then can one talk of acceleration in growth.
2021 will be an important year from the point of view that as the economy recovers, very gradually will the financial system be up to it in terms of assisting this kind of growth.
The $5-trillion economy target is in place. According to the IMF chief, we will need 8-9% growth to achieve that by 2025?
Absolutely. This $5 trillion is something which we should keep out of our minds because it is going to be quite a long time before we reach this particular mark. When we are talking in terms of how do we get to this particular number, we need to have nominal growth in GDP reaching around 13-14% consistently for a period of five years.
Currently, we are talking of inflation in the region of 4%, we are talking of growth in the region of 5%. So, our nominal GDP growth is less than 10%. It is going to take at least six to seven years to reach it. Again, I would say what IMF has pointed out is quite right. We need 8-9% growth in real GDP, which we cannot see happening in 2021 or even 2021-22. It is going to be a bit of a stiff climb towards that particular target of $5 trillion.
She also expressed her concerns over the slow pass through of rate cuts that has been seen in India. How would you react to that?
I would have a slightly different view because I think when the RBI lowers the repo rates, that is a kind of a signalling rate and the way in which banks react, should be their prerogative. They have to look at their assets and liabilities, they have to see what are their costs and in terms of their incomes.
More important is the risk perception. That is how you bring about a change in the actual lending rates. It is going to be a mismatch between what the government and the RBI want to do in terms of signalling lower interest rates and how the banks are going to react, because today we are talking of a credit environment which is still definitely more on the risky side. Banks will be a bit cautious because the NPA hangover has been quite severe.
We are also talking in terms of the SMEs which seem to be the next burning point in terms of NPAs. The banks are being cautious in terms of the transmission. We are also seeing that deposits, financial savings are being affected. It is going to be a delicate balance between the two. Banks should not be hurried to bring about this kind of transmission change.
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