‘We are transitioning to a more robust global economy’

CHETAN AHYA, global co-head of economics and chief Asia economist at Morgan Stanley, the global financial services entity, says global recovery will be on a sure footing, good news for Indian and regional export. Edited excerpts of a talk with Anup Roy:

What is your expectation from the Reserve Bank of India's policy review? We are not expecting RBI to change the policy rate or stance. They might reduce their concerns on the inflation outlook, which probably could be interpreted as a bit more dovish by the market. We are expecting RBI to get back on the rate hike path in the second half of 2018. Until then, they might hold rates steady.

We are expecting inflation to go up to the 4.5-5 per cent range by end-December. That doesn’t really warrant a rate cut now. As you see the normalisation of the inflation trend in the background, you will see pick-up in growth and demand. We expect GDP (gross domestic product) growth to accelerate back to about eight per cent (yearly) soon. For March ’18, we are at 8.2 per cent, with a bit of a benefit from the last fiscal’s base effect. RBI says the effect of demonetisation would be transitory. Do you agree? Largely but some aspects of that decision have left a longer lasting impact, particularly in real estate. We see that being corroborated by steel and cement production data. So, it’s not only realty sales but it looks like it has an impact on construction activity as well. Apart from that, the consumption impact has been transitory, as is visible in two-wheeler sales. I always look at two-wheelers as a good indicator for what is happening to discretionary consumption. Two-wheeler sales in May have been growing in double digit, the second month of positive data after demonetisation. This shows discretionary spending is back. Do you expect the capital expenditure cycle to turn around? How about capacity utilisation? Capacity utilisation has started improving. When we do the analysis of its trend, the big link of that has been driven by what happens to export. These have turned systematically for the past few months -- the last two months have been extremely strong. Wearing my global hat, I do think that this recovery in export that we are seeing in India is likely to be more sustainable. In fact, the sequential trend here in the past six months has been the best since 2010-11.

This is a very different trend. A simple average of the past five years won’t do justice here. If you see the underlying drivers of the global economy, it seems the present trend is more sustainable. This would help improve the capacity utilisation. The taper tantrum was a trigger but India was using policies which were misallocating (resources), and the current account deficit and inflation were high. You had to take a hit on consumption. That’s the only way to fix inflation but it affected capacity utilisation.

Now, consumption is looking like normalising. And, you see external demand parallely moving together. That will help improve capacity utilisation and, therefore, help improve capex. You will see a visible turn by Q1 (the first quarter) of the 2018 calendar year. What gives you the confidence in saying the export case is different this time? This global recovery is different. What we have seen since 2012 is ‘bumpy, below par and bitter’ – BBB recovery. That has been going on for a while. We're now changing our narrative on the global macro outlook. We are transitioning to a global economy which is more robust. We are right now seeing recovery in a broad-based manner, across geographies. The US, Europe and Japan are all doing well within developed markets (DMs). Within emerging markets (EMs), commodity importers and exporters are both doing well. In Asia, in the 10 countries we cover, we have upgraded GDP growth (estimates) for seven. I have been doing this for years but I can’t remember the last time we were upgrading GDP growth in Asia. We looked at 35 countries (both EMs and DMs) and saw that in the past two quarters, there have been a meaningful acceleration on capex, too.

So, it is not only consumption; the investment cycle as well has picked up globally. That gives us the confidence that this is a different recovery and on a surer footing, more policydriven and one or two large economy-driven.