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Urban demand rising; see 7.9% growth in FY17: Goldman Sachs

Investment bank Goldman Sachs has said India will grow 7.5 percent this year and 7.9 percent in FY17. In an interview to CNBC-TV18, chief India economist Tushar Poddar says while rural demand remains subdues, urban demand is picking up significantly.

Furthermore, he says the cyclical upturn is likely to continue next year, driven by this domestic demand.

On the road ahead, Poddar says the Reserve Bank of India  has very little room to cut rates ahead, adding that he sees lesser risk to India from US Fed rate hike.

Below is the transcript of Tushar Poddar’s interview with Sonia Shenoy and Anuj Singhal on CNBC-TV18.

Sonia: You predict a 7.5 percent growth this year and 7.9 percent growth next year. Can we grow faster when the global growth appears to be slowing even more?

A: I think the external drag continues in 2016 because we are not seeing a sharp upturn in the global economy, but domestic demand in India has turned. If you look at urban consumption demand for instance, it is clearly showing an uptick now and a whole host of indicators are suggesting that the cyclical activity is picking up. You have got a 125 basis points of rate cuts which have been delivered, which are going to pass through the system gradually. You have got a fiscal expansion that is going on with government spending coming through, and you have got the urban consumer finally showing signs of life. So I think the cyclical upturn which is based on domestic demand can continue in 2016. So you will see an improvement in growth as you go through the year.

Sonia: Next year public spending by the government may fall, because the government has to fork out money for the seventh pay commission, plus bring down the deficit by 0.4 percent to 3.5 percent, something that they will cut the public investment. Also the private sector is still going at 70 percent capacity utilisation. So where do you see growth coming from?

A: I do not think that public capital expenditure (Capex) is not going to continue. I think we have already seen a sharp increase in public CAPEX. If you look at the spending plan is for highways and railways. It seems like a pretty ambitious spending plan and it is not only for 2016, but also medium-term. So I think that that aspect is foolproof. I cannot see the government cutting back on the Capex plans which have been announced on that regard, and as you said, the pay commission recommendations will add a stimulus to domestic demand and private consumption as well. There is an issue of about managing this to contain the fiscal deficit. That is going to be a challenge.

There are some helpful aspects, which is the increase in excise revenues on the oil front. But also I think the government would have to find sources of revenue and do greater disinvestment in FY17 if it has to continue to spend both on Capex as well as on the planning commission. Even that being said I think the sharp fiscal consolidation path that the government has outlined is difficult to achieve for FY17. I think that they will have to be slightly less ambitious. And I think what they will try to do is to come on the side of Capex more than on the type of fiscal consolidation that they have outlined.

So it is not going to come at the cost of growth. I do not think so.

Anuj: RBI’s January to March 2017 forecast is indicating there is not much room to cut rate. So how much do you think the RBI would cut and more importantly, how much will the money get cheaper for the borrowers considering that banks have not passed on yet?

A: I do not think the RBI rates are going to fall. I think that the RBI is probably done with rate cuts. If you think that we are expecting 125 basis points in hikes by the Fed between now and the end of 2016, the risks to inflation are all to the upside. Whether you think about the pay commission impact, whether you think about adverse weather conditions through El Nino, the fact that we have had two bad monsoon, so the groundwater is depleted, there are still structural bottlenecks in the food economy, all the risks to inflation are to the upside. I do not see downside risks to the inflation at all.

So if the RBI is pat, then what happens to lending rates? I think that there is still monetary transmission has not happened to the extent, the Governor mentioned that. Only 60 basis points is transmitted of the 125 basis points. So, I think that is going to happen whether voluntarily or through moral suasion by RBI, or through the advent of a new way to calculate the base lending rate. I think that there will be greater monetary transmission which means that lending rates will come off. However the RBI, I do not think may have too much room to cut further.

Sonia: How do your global colleagues see crude next year? More lows expected? And more importantly more lows on metals as well?

A: Our view is that the structural view is lower for longer and the near term risks to oil especially is significantly to the downside, inventories are at record levels, so you could see significant downside risk to oil prices in the near term. However, as you go towards second half of 2016, we see a pickup in oil prices partly because of a waning away of some of this inventory, demand pickup and also because some of the base effects go away. Our 12 month forecast on oil is USD 54, but the metal forecast, and it is very important to distinguish between oil and metals is for much weaker metal prices. Copper, iron ore, thermal coal, all of these will decline quite considerably.


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