We have healthy macros but a weak underbelly: Dr DK Joshi, Crisil

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, and Dr DK Joshi, Director & Chief Economist, Crisil, discuss macro cues and that retail credit will continue to drive their portfolio for some time unless the investment cycle picks up which is some time away.

Edited excerpts:


Sebi has cracked down on 331 companies, marking them as shell companies. Now companies have been crying foul saying we had no idea what hit us and we are going to be trying to engage with market regulator to resolve this matter. How do you see the bigger picture here?

Mythili Bhusnurmath: Actually, I am very heartened to see the action by Sebi because it is high time we did a clean-out of our entire business side. The corporates in India have been indulging in a whole lot of activities which perhaps are strictly not kosher and whether it is through the shell companies or whether it is through evasion of taxes, circuitous trading, round tripping or whether through use of PE notes -- it is high time that we cleaned up the act on the capital account front on the capital side front. Along with the government launching GST, demonetisation, at least the supposed intention of the government is to clean up the entire idea of corruption, black money etc. So, wholesale cleaning is going on and that is very welcome in the medium to long term.

But it has to be done in such a way that those who are not really guilty, are not in any way penalised and only the guilty are punished, That is going to be a quite a difficult act. So all regulators will have to tread very carefully.

Even as the market has been growing from strength to strength, I for one would be very happy to see that market regained its senses because it goes completely out of kilter with the underlying economic fundamentals. They can march ahead only that much. Even if you look at markets forward looking, it is very important that the underlying fundamentals back that momentum in the markets. Otherwise, when the reversal happens, it will be much too severe.

Mythili Bhusnurmath: DK, how do you see the Indian economy through the prism of the bond markets, the currency market, the stock markets which is very rosy or through the prism of the IIP the core sector investment which is very gloomy? Or are you somewhere in between?

Dr DK Joshi: Well I would take a middle path. There are several ways to look at the economy. One is to focus on the macros and there is little doubt in anybody’s mind that the macroeconomic picture from key parameters -- if you look at GDP growth or inflation or the yields or current account deficit, these are some of the key variables that enter into computation of anybody who is willing to invest in a country. From that perspective, it is good. The problem area is pretty well understood. One is the banking financial sector. The banking sector is not in good health and also the private investment revival remains an issue. It is a case of healthy macros but weak underbelly that is how I would portray the overall economy.

Mythili Bhusnurmath: But how long will a weak underbelly continue and at what point will it start impacting? Already, gross capital formation has been slipping steadily even though economic growth has revived to some extent from the low that we saw in 2012-13. Economic growth has picked up even though we saw a temporary reversal but the fact is as far as investment is concerned, it has been steadily downhill.

Dr DK Joshi: That is largely because the private sector is not forthcoming and the reasons again are fairly well documented by now. The leverage in the private corporate sector is still quite high and they need to deleverage. This means there is some more weakness in the economy and manufacturing sector. The survey that RBI released one or two days back on business perceptions, is also showing some softening of perceptions from the business confidence side and that is reflective of the fact that there is excess capacity particularly in the manufacturing sector.

Manufacturing is a private enterprise. More than 90-95% of GDP in manufacturing and investments and manufacturing is done by private sector. And unless they see improved prospects, as long as they are sitting on excess capacity, they are not going to chalk out plans for fresh investments. So it is going to be a grind up. We are not going to see a sudden surge in growth from these levels. It is just going to be a mild grind-up and these two things -- private investments weakness and weakness in the banking sector -- will to some extent hold the growth back. For larger players, finance is not so much of an issue because the bond market is growing quite rapidly and also they are able to tap them and the NBFC credit to the retail sector is also healthy.

From the banking perspective, my sense is that the retail credit will continue to drive their portfolio for some time unless the investment cycle picks up which is some time away. The best we can expect this year is that the investment to GDP ratio which has been falling for seven years continuously now does not fall any more. That is the best scenario for 2017-2018.

Mythili Bhusnurmath: That is what we can hope but even as we cannot expect a dramatic V-shape recovery, the fact is that have we completed the bottom end of the V because this Friday we do have our IIP numbers and what according to you will these IIP numbers show? Will it show the economy is picking up or will the pains of GST linger for some more time?

Dr DK Joshi: I think it will continue to display weakness for the month of July as well. And the PMIs that were released a couple of days back...

Mythili Bhusnurmath: Are you a little hopeful that we will see some demand revival courtesy the Seventh Pay Commission? Agriculture has been relatively good. How long before we see a demand revival?

Dr DK Joshi: We are a little bullish on the private consumption demand which has been outperforming the overall economy for the last two-three years and that scenario will get some leg-up from the agriculture side and also from the Pay Commission.

One should remember that the Pay Commission is now going to be implemented at the state level and that can provide some support but this is all support to the economy. iIt is not something that is going to create a surge in growth. We are just talking about supporting the growth at these levels or maybe a mild push. Our forecast for 2017-18 is 7.4% which is just mildly above what we experienced last year.