Hugo Erken, senior economist at Rabobank’s RaboResearch Global Economics & Markets, is credited for rightly predicting that first quarter gross domestic product (GDP) growth in India will decelerate to 5.7%. Netherlands-based Erken’s forecast was the most accurate in Bloomberg and Reuters surveys, where the median forecast for GDP was 6.5% and 6.6% respectively.
In a telephone interview after the release of official growth numbers on Thursday, Erken said sluggish private investment, as a result of the lasting impact of demonetization, was expected to impact growth.
He said that while the rollout of the goods and services tax (GST) is expected to weigh on second quarter GDP growth, on a medium- to long-term basis, the Indian economy has the potential to reach a higher growth rate. Various reforms undertaken by Prime Minister Narendra Modi are the main reason for his optimism.
Edited excerpts of the interview:
You rightly predicted Q1 GDP to decelerate to 5.7%. What was the basis of this prediction?
At Rabobank, we use NiGEM, an econometric world trade model, for our economic forecasts. Partly the sluggish consumption in private sector was expected due to lasting impact of demonetisation. This was visible in the previous quarter as well. Another factor that we looked at growth of bank loans, which was negative and decreasing. Part of this was because of build-up of stressed assets. In our forecasts we also take into account the impact of GST, which will probably weigh on growth in the July-September quarter.
What are your thoughts on demonetisation?
I think it is little bit too early to say if the exercise was useful. We still have to see what will eventually happen with tax collection and revenues. Personally, I think it was a bold decision, but in the end it will be beneficial to India because of continuing formalization of the economy. In the short-term, it is disruptive and as the GDP numbers show, India is paying a price for it. However, in the medium-term we are still confident that India GDP growth will pick up quite rapidly to somewhere near 8% towards the October-December quarter. We are quite bullish on India in the medium- to longer-term.
What is the basis for your optimism?
We think that the reforms undertaken by the Modi administration so far are will generate a positive impact on growth. Also, by the end of year, transitory and negative impact of GST, as well as demonetisation, will peter out. The central bank (Reserve Bank of India) has also taken steps to clean (up) bad loans. We think this will improve the health of the banking sector, especially public banks, and help aid private investment.
What is your GDP forecast for Q2?
We believe GST will continue to weigh on Q2 GDP as seen from the July purchasing managers’ index, which fell sharply. Our Q2 GDP forecast is somewhere near 5.9-6%.