Even as we need to lower the debt to GDP ratio, it would be better if we could lower it in real terms. Unfortunately, inflation has become a big bugbear for us. Inflation is raging much too high for us given the fact that we have a large section of the population below poverty line, says Mythili Bhusnurmath, Consulting Editor, ET Now
Can you just talk to us about the sudden downgrades that are coming in terms of GDP? Do you think it was already factored in and now that crude is not cooling down, inflation is not coming down, it is just a matter of time that some of these global agencies came out and downgraded GDP growth numbers?
Well the downgrade of the GDP numbers has been expected and almost every international agency, multilateral agency – whether it is IMF or the World Bank – have been downgrading growth rate numbers for not just India, but for virtually every other country in the world and also for the global economy as a whole.
The downgrading of the growth estimate is not surprising. What is encouraging really is that even as they retained the rating at BBB minus, which is the lowest investment grade, they have improved the outlook from negative to stable. That is what we should take note of and it is really encouraging because Fitch is the smallest of the three main rating agencies. Moody’s and Standard & Poor’s had already put India’s outlook at stable earlier. In fact, Moody’s revised it in October 2021 after a gap of two years when they revised the rating from negative to stable.
Fitch is the latest and the smallest within three rating agencies to change their outlook for India from negative to stable, even as they retained the rating at the lowest investment grade. What is heartening was that the downgrade of the GDP growth is something that India shares in common with all other countries and let us not forget that even with the lower GDP estimates of 7.8%, (7.2% as per RBI) it still puts us amongst the fastest growing. This is against the contraction that we saw the previous year but what is interesting to note in Fitch’s note really is that things like debt to GDP ratio are coming down. That has been driven largely by inflation boosting the nominal GDP.
Even as we need to lower the debt to GDP ratio, it would be better if we could lower it in real terms. Unfortunately, inflation has become a big bugbear for us. Inflation is raging much too high for us given the fact that we have a large section of the population below poverty line, especially if you look at absolute numbers.
Even as we take heart from Fitch changing and improving outlook to positive, to stable and catching up with the other two rating agencies, what is important to take note of is that we need to focus on inflation coming down even as our nominal growth remains very positive and in real terms also anything over 7% would be good going. We really need to work on our macro fundamentals because the current account deficit, the fiscal deficit are all near dangerous territory. I would not say we are out of the woods, but we really need to work hard to get out of the woods.
Today the US inflation data will come out and over the next one week we will get a lot of inflation data from across the world whether it is Eurozone, India, China, various other inflation data will come out. People are still building in that inflation has peaked out and it should come down. But if there is any semblance of it not peaking out, would the adjustment across equity assets happen?
One month’s data does not really change anything but what we do have is authoritative voice of the Reserve Bank of India telling us that we are going to have inflation at over their target of 2-6% and over the upper end of 6% for three quarters in this current fiscal. That is what I think markets will need to reassess and take fresh calls on what the bond yield will be like. How does it impact equity markets because interest rates going up is never good news for equity markets.
Clearly some kind of reassessment will have to take place not only in India but all over the world because we have seen inflation rates way beyond what is normally acceptable, not just in India but also in the US and Europe. It is a common feature all over except that in the Indian context, high inflation hurts us much more than in prosperous economies.
Do you expect that the peak out factor in India will also come with a lag effect?
Well it is hard to say but we have seen the wholesale price index at about 15% and that has not yet fit into the retail prices. So though we might see May consumer price inflation data come in at little lower than last time’s number, that would be driven largely by base effect.
By the way, last year inflation was very high. In contrast to that, the numbers that we get now in May will seem a little lower. Inflation is a worry that we still have to deal with and as per RBI’s old mission, we are going to have to live with inflation of over 6% for three quarters in this current fiscal.