HDFC Bank for step-up in public investment

HDFC Bank has projected India's gross value added (GVA) to grow by 7.8 per cent in 2015-16 if the monsoon rain is better than projected by the weather department. And, 7.2 per cent if it is as scanty as predicted.

The GVA rose 7.2 per cent in 2014-15 and 6.6 per cent in 2013-14. It is not the same as gross domestic product (GDP). GDP is GVA plus indirect taxes.

The bank said so in a note on the economy. And, said these higher estimates were also based on a pick-up in public-led infrastructure capital expenditure and the possibility of more accommodative monetary policy by the Reserve Bank of India.

It also raised a question regarding RBI's current focus on the consumer price index (CPI) for its monetary stance. "Our prognosis is that an inflation targeting regime fixated on the CPI...is likely to produce interest rate signals that are sub-optimal from a growth perspective, paying less heed to the output gap than is warranted at this stage," the note said.

It pointed to the negative trend in the wholesale price index (WPI) for seven weeks in a row, contrasted to the CPI's five-plus per cent in May. Even so, the Bank said,

"We argue that despite RBI's hawkish stance communicated in the (latest) monetary policy (review), the scope for further policy rate cuts in the current financial year remains."

RBI has cut the prime lending rate by 75 basis points (bps) since January, doing so by no more than 25 bps in three phases, pointing to risks in going faster, including the prediction of a deficient monsoon.

RBI had set a glide path of CPI inflation, at eight per cent by January 2015 and six per cent by a year later. CPI inflation was 5.16 per cent this January.

Earlier, Arvind Subramanian, the government's chief economic adviser (CEA), had also implicitly raised questions about RBI's monetary stance, based on CPI inflation. "So, is the stance of current (monetary) policy appropriate? Of course, that is difficult to say but at the very least, there needs to be more analytical discussion. In particular, there needs to be greater recognition that these are unusual times," he'd said.

Real policy rates have diverged significantly for consumers and producers, being unusually high for the latter. For producers, high real rates must also be seen against their balance sheet problems, he'd said in an article.

Supply-side issues
HDFC Bank's note said negative WPI inflation suggests the industrial economy is operating well below potential, alongside declining but considerably higher consumer price inflation that reflects myriad supply-side problems.

The note highlights the current problem of lack of private investment due to over-leveraged balance sheets, a point raised by the CEA in the mid-year analysis of the economy last year.

"We believe there is broad consensus on the fact that much of the private sector is reluctant to invest because of overstretched balance sheets and low capacity utilisation," the Bank said.

It highlighted the need for a step-up in public sector investment and said a potential revival is underway in sunrise sectors such as defence and the more conventional areas such as road construction.

"We are encouraged by the fact that some of the investment spending is likely to be driven not only by the promise of higher financial allocation but also through institutional changes and mechanism redesign that make it more viable for the government and private players to work in tandem," it said.