Chetan Ahya, MD of Morgan Stanley, said that the kharif output could fall 15% on monsoon deficiency. “However, there won’t be a major impact of poor agriculture on industrial growth,” he said.

Ahya said he was expecting gross domestic product (GDP) at 5.2-5.8% versus 6.4% and agricultural GDP at -2 to -4%. Exports were likely to pick up in the next few months and may see a ‘V-shaped’ recovery, he said. He expected WPI inflation at 6% in March 2010.

Here is a verbatim transcript of the exclusive interview with Chetan Ahya on CNBC-TV18. Also watch the accompanying video.

Q: How bad is the situation and has it led you to rework any of your forecasts for the year?

A: We haven’t changed our forecast as yet, in line with the way the monsoons have been going. We have changed the agricultural production once earlier; we have cut it down from 3% to 1.5%. But instead of doing the gross domestic product (GDP) growth forecast changes every week, we are waiting for what is happening on rainfall.

We probably have now adequate amount of data. So, on the basis of what we have, which is a 25% short fall in rainfall uptill August 25, it appears that assuming that we are ending anywhere between 20-25% shortfall of rains in the monsoons this season until end of September. You would probably see the kharif output declining by about 15% or so in the range of that. Similarly you will probably see the impact of that on the rabi output, the water reservoir levels are low. Even if things are normal in a month of September, there will still be some shortage of water levels in the reservoir. So you would probably see the rabi output also getting affected by about 0-5% in agricultural volume production terms. But as far as the agricultural GDP is concerned, you have other areas, which are forestry and fishing. So, we have to take a total view and the agricultural GDP in our view will be between -2% to -4% depending upon how the last month of rainfall goes. In that context, you will have the GDP growth, overall at about 5.2-5.8%. This compares with our best case of agricultural GDP of 1.5 and GDP growth of 6.4.

Q: On the subject of what kind of agricultural growth you have pegged because the MET department indicated that it is going to be the worst than 25% you have penciled in and infact they indicated 30-40%. In that case would you have to rework the numbers?

A: 30-40% will mean that you are basically talking about a rainfall in monsoon season. So, upto August 25, it is -25 (minus 25) and we are already down to 18% of the monsoon season. We only have about 20% left. You will need to have some massive shortfall in the last month to get to that 30-40%. So I don’t know where this number is coming from.

Q: The other lingering problem right now is what happens with food inflation. Any targets that you have got going on how fast inflation might spike up and what the impact on food inflation might be?

A: Right now, we are looking for the wholesale price index (WPI) to go to about 6% by March 2010. So, assuming that you have normal rainfall in the last month of the season, we think the food inflation aspect will be manageable. There might be upside risk to the 6% year-on-year (YoY) number in March 2010, but it will not be a hell a lot upward risk from there. The reason is that government has got enough stock of the two of the key staple items which is rice and wheat and for sugar and pulses, there will be imports to take care of pressure, which will be addressed maybe in other two months time. So we have a temporary spike in food inflation, which will probably sustain for another two months and then after that as imports come through, you should be able to see some downward pressure on food prices.

Even for pulses, the farmers have taken up much more area under cultivation, so you should see some reprieve on pulses. What we are seeing right now on turdal is essentially the lagged effect of the previous crop having been bad for pulses. So, hopefully, in two months time, we think inflation pressure should reduce.

Q: In this new GDP target that you are setting out, 5.2 to 5.8%, are you building in any kind of slippage on the manufacturing front which is as a corollary of the agricultural decline or not necessarily or you don’t have any reason to scale down industrial output numbers at all?

A: I don’t think there will be much impact of poor agricultural on manufacturing and services in terms of the final number that one would think about. There is some downside pressure, but there is an offsetting upside surprise which is coming from the underlying industrial activity. So, if anybody has a forecast for industrial production which is at – we have it at about by March 2010, it will be about 8%. If we were to cut it down by a percent because of agriculture, we are right now getting simultaneously upside surprises from other areas, which is going to offset and so we still have it around 8. So in the end, we don’t see much impact of this on manufacturing production or services sector output.

Q: Give us your thoughts on corporate earnings though, the quarter gone by was actually a positive surprise for us but if you push all this, which is a weak monsoon perhaps a lowering of GDP targets and commodity prices that are rising, would you worry about corporate earnings performance?

A: If you look at the trend for industrial production, last two months have been big surprise for us. Yesterday the Commerce Minister mentioned the industrial production in the month of July will be close to 7%. So, I think the volume of economic activity has already picked up without seeing the support of exports. Exports have still been down by about 28% in the month of July year-on-year. If you look at the ISM New Orders Index which is the purchasing manager index in the US, which tends to be a good leading indicator for India’s exports, it leads by about 4-6 months that has spiked up in a big way which is indicating that the export numbers are going to pick up in the next few months and we could almost probably see a V-shape recovery in exports as well. So, in that case, you have not seen the benefit of exports recovery and cumulatively taken together pick up in domestic demand, pick up in external demand, we think that the corporate sector will see a lot much more strength going forward over the next six months.

source: Moneycontrol

Tags: agricultural, Chetan Ahya, corporate, Exports, GDP, gross domestic product, kharif output, monsoon, Morgan Stanley, rainfall

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