The global economy could slip into recession in the financial year 2020 if trade tensions between the US and China escalate, said Chetan Ahya, chief economist and global head of economics at Morgan Stanley.
In an interview with CNBC-TV18, Ahya said if a deal takes place between the US and China on June 29, it will be positive for India as the country’s industrial cycle is linked to the global environment.
Edited excerpts from the interview:
What is the sense you are getting, does it look like this US-China tariff war get pulled back and what is read for the global economy?
Honestly, nobody knows whether the tariff war gets pulled back. It’s only the two presidents who know, but we think some damage is done to the global cycle. Secondly, if they actually do continue with escalation, the risk of global recession hitting us in 2020 is relatively high.
So it is not a slowdown that you are expecting, you are actually expecting a global recession?
We have had the slowdown. We were at 4 percent in Q1 of 2018 in terms of global growth and we are already down to 3.2 percent. Global recession threshold is 2.5 percent. So if we continue with this escalation, we could be in three-four quarters, down to the level of 2.5 percent which would be qualifying us to be in recession at that point of time.
What are you expecting from the upcoming Fed policy, can it ease as early as that?
It is very difficult because they would not know what happens on June 29 when the presidents of China and US meet and it would be very difficult for Fed to pre-empt that outcome and take the rates down.
One thing that the Fed definitely looks at is the overall financial conditions which his basically what is happening to credit spreads, what is happening to dollar, to stock markets. But right now financial conditions haven’t tightened enough for them to actually take the plunge.
Let me come to it from an emerging markets (EMs) point of view; The dollar index was at 98 and now it has come down to 96.5. The EMs normally do well when the dollar is weak. So do you think EMs like India can get some relief?
No, if we go into global recession. So the way you think about it, this is evolving in two stages: In the current stage we are in the market saying that the US growth could be 1.5-2 percent and Fed is responsive and is cutting rates, that is kind of sweet spot for EMs. But if you cannot manage to keep the US growth in 1.5-2 percent range and we head towards recession then unfortunately you will have a risk, dollar rises and all the emerging market assets will sell off.
But at the moment India feels like we are in a sweet spot -- the dollar-index is falling, usually that means more expensive commodities but not in this case because there is a global slowdown. So we have crude at $62 per barrel. That is a great combination for us. Do you think India will be seen at least as a market that benefits, other EMs suffer when commodities fall, we gain, so would you at least say, India has a slightly better chance?
I will go back to the earlier discussion we had. If you expect that there is a deal on June 29 between the US and China, then the sweet spot scenario comes into play because the Fed has already indicated that it is ready, unlike 2018 when it was saying it was far away from neutral and it was going to get in too restrictive. It is right now saying that it will be easing. Therefore, you need that confidence that global economy is not going into a recession. So if we continue into current scenario then it’s great for India, but if we head into a recession then unfortunately not.
I do think that here in India people under-appreciate how much closely Indian business cycle is linked to the global cycle. The way I describe this scenario is that there is no absolute winner in this trade war; you need to have really strong, very different domestic fundamentals which I don’t think we currently have in India as well. So, India is a relative gainer but not an absolute gainer.
Coming to India more specifically, there is this Arvind Subramanian paper -- where he argues that when he looks at 17 indicators from 2001 to 2017, in the last seven years, that is after base year got changed, Indian GDP is not gelling with this 17 indicators -- we should be more like 4.5 percent growth for 2011 to 2017 – your first thoughts? Where you also confused with this GDP numbers?
I definitely think that there is some possibility of overstatement. During my days when I was researching on India, the way I was looking at the data closely, was looking at the broad aggregate corporate revenue, EBITDA growth and net profit growth. Yes, you get an estimate of nominal activity and not real, but that gives you a better feel of what is going on in the economy rather than looking at the GDP statistics which have got all kinds of issues and the most important being the deflator.
I wanted your view on this 5.8 percent GDP growth that we saw in Q4, we were all prepared for 5 handle and a lot of people forecasting closer to 6 – do you think this is a deeper growth problem than we are appreciating and how long can the slowdown last you think?
I think it is a deeper growth problem. There are two reasons for that. One is that global environment is not good, we looked at global trade numbers, global trade volume is currently growing at close to zero percent year on year, which is very different – on an average global trade volume growth is around 3.5 percent, at the peak in early 2018 we were at 5 percent. So the global environment which you have to look at from exports perspective for India is not looking good and if you look at nominal industrial production in India versus nominal exports it is very tightly linked. So the industrial cycle is very closely linked to what happens to global environment.
Our strategist Ridham Desai and I had looked at what happens to India’s corporate revenue and profit cycle, it is surprisingly very closely linked to nominal IP. So while we can look at overall GDP growth what matters for the corporate sector is what happens to the global business cycle. I think that is one challenge for India.
The second thing is the financial system is in some kind of stress and we need to fix that to get that domestic demand going even when the external environment maybe bad. I think because of that there are some significant challenges ahead of India to get recovery going.
A large part of our banks’ NPA have been recognised and provisioning has gone steeply higher in the Q4 numbers. There is non-bank finance problem which is now rearing its head along with the housing finance problem. Do you think a lot more slowdown can be inflected by the NBFCs problem?
Yes, I think so. I think the challenge would be to not get that kind of credit growth support that is needed for strong recovery. I think we can have a steady low growth environment that we are in right now, but to accelerate from here we do need to fix that NBFC system because it can have an impact on the overall financial system.
We already had three rate cuts and in the last policy the governor had also indicated that liquidity will also be accommodative. You think that is a corrective mechanism for assuring second half growth?
I go back to the earlier discussion, I think the big picture is you have to get that global growth going. Second, you have to fix the financial system. I think both these issues are more important than policy rate cuts. We have been seeing that policy rate cuts have been happening but if you look at the banking system’s loan-deposit ratio, it is not transmitting into an aggressive cut in lending rates.
I spoke to former RBI deputy governor Rakesh Mohan a few days back and he was also saying that net household financial savings have fallen and that probably is to be addressed before we expect rate cuts to get transmitted. But do you think we have enough headroom for rate cuts, at 5.75 we are at 2010 levels in terms of repo. Is there something more that the RBI can do?
I think when India does not have too much profligacy and high inflation, the central bank gets to look at the growth problem and that is happening right now; investment growth is weak, GDP growth is weak so it does call for some policy rate cuts but the challenge as I mentioned to you is that we are also at a point of time in cycle where loan-deposit ratios are high and it makes it difficult to transmit, but from policy stance’s perspective I think it is the right approach to take down rates lower.
Now coming to the budget, I know it is just one budget in the scheme of things but does it have a space for fiscal stimulus and should it go for some kind of a fiscal stimulus?
I think if they take up something which is supporting the real estate sector and the corporate sector in the form of tax cuts or tax incentives, the market will accept expansion of fiscal deficit because the need of the hour is that you need to kick-start that growth cycle and we just discussed the challenges that the monetary policy faces. So fiscal policy and the government’s broader policy are the ones which need to take the responsibility of
kick-starting this growth cycle.
What you are recommending or seem to suggest is that there is space on monetary and there is space on fiscal, but remember the last time when we had monetary and fiscal loosening in the periods of 2011-12, 2012-13, we ended up with double digit inflation for the next four years. We became one of the fragile five. So would you still recommend monetary and fiscal loosening concurrently?
Yes, I think so. I think the nature of fiscal easing --- I think monetary loosening is simpler one, and what they are doing is absolutely fine but on the fiscal front the nature of the fiscal expansion has also got to be looked at. If there is a big increase in transfers to households that would be inflationary, but if there is a tax cut for the corporate sector, if there is some incentive for the housing sector – that kind of expansion of fiscal deficit should be pro-growth and not be causing concerns on inflation.
First Published: Jun 11, 2019 9:33 PM IST
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