Feb 28, 2013 07:53 AM IST | Source: CNBC-TV18

Economic Survey: StanChart Bank wary of govt's ambitious growth targets

Samiran Chakrabarty of Standard Chartered Bank says the economy may recover but not as much as the Economic Survey expects it to.

Samiran Chakrabarty of Standard Chartered Bank says the economy may recover but not as much as the Economic Survey expects it to.  The Economic Survey 2012-13, tabled in the Parliament today, pegs the Indian economy growth between 6.1 percent and 6.7 percent for FY14, but adds, the revival will be slow in the near-term.

"We all know what happened in FY13. The economy did not recover. It continued on decelerating path for most of the time. So, it is difficult to say that the economic recovery will be so much that will move to 6.5 percent from 5 percent in FY13," he told CNBC-TV18 in an interview. 

Below is the verbatim transcript of his interview to CNBC-TV18

Q: Will any number in the Economic Survey change your numbers or your forecast for the Budget? Do they even give you a whiff of the nominal gross domestic product (GDP) they will assume?

A: Not really. I would expect a lot of discussion around two other things. One is current account deficit. Is it becoming a structural issue for India and to what extent we can address this through fiscal measures?

The other is the decline in long-term savings rates particularly household financial savings and what is the genesis of this and what could be done to get it back on track? I think these two issues apart from the investment driven growth issue should be the highlights on the survey. These are areas where ideas are required not just for this Budget but probably over the course of next two-three years. So, unless we start today, it will be too late for that.

Q: Do you agree that 6.1-6.7 percent is perhaps an ambitious assumption and therefore if they go with Rs 112 lakh crore or 112.5 lakh crore nominal GDP, from the start you will doubt all the targets that the Budget lays out?

A: If compared to the last Economic Survey, the uncanny similarity is that both of them were saying economy was bottoming out. Also that probably in the next couple of quarters it will start turning around. The language seems to be exactly the same.

However, we all know what happened in FY13. The economy did not recover, it continued on decelerating path for most of the time. So, it is difficult to say that the economic recovery will be so much that will move to 6.5 percent from 5 percent in FY13.

If that number is correct. There seems to be no specific assumption or at least none that I have seen on the screen about what will drive this improvement from 5 percent to 6.5 percent. Is it going to be investment, consumption or the net exports. Especially given the fact that the government side there will be a contraction.

Q: A little bit of monetary easing is assumed and beyond that even I do not see so far anything to assume.

Yes, but we all know that monetary easing is not good enough to kick start a capex cycle in a fashion that can prompt growth up from 5 percent to 6.5 percent. Having said that last year we projected a survey that will grow around eight plus.

We ended with something like 5 percent. So, compared to that this time the disappointment might be more limited. So, even if we do not get 6.5, we would get something around 6 percent mark. So, it is not going to be too divergent from their expectation at least that is what I hope.


Q: What are your thoughts, will this kind of auster note which Raghuram Rajan seems to have brought to bear in the wording of the economic survey become the main theme of the Budget at all?

Clearly austerity is something that the Finance Minister has been promising us for the last couple of months. He has shown his intention to do it clearly through the cut in planned expenditure that he has done over the last five months. So, there is no doubt that austerity will be a plank but at the same time austerity does not give you growth.

We are also sitting on 5 percent growth and thinking that from the monetary side more rate cuts will create room for further growth. I don’t think this kind of a combination is an ideal combination. We seem to be having a situation. Earlier where monetary policy was trying to control inflation, while fiscal policy was boosting inflation.

Now we are going in the other direction where fiscal policy is trying to go auster and control growth whereas expecting monetary policy to support growth. This seems to be creating a disharmony in policy, which we need to avoid. My own sense is that we should present a pragmatic Budget rather than an auster Budget at this point of time.

We cannot expect to see something like Excise duty going back to 14 percent again with industrial growth at zero percent. I started to think what will happen to industrial growth if this Excise duty goes up even further.

Q: Should we assume that the government may assume a much lower subsidy amount for fuel? From the current price cut of 45 paise you are not really getting a very significant fall in fuel subsidy. What do you think they will assume by way of fuel subsidy and do you think therefore there will be more fuel price hikes as we go along in FY14?

From the perspective of subsidies, as a percentage of GDP, most likely the FY13 number is going to be close to 2.5 percent of GDP. I would presume that the Finance Minister would like to announce a subsidy-to-GDP ratio of about 2 percent for FY14. The fact remains that you will have to put some allocation for the Food Security Bill.

So, anything between Rs 10,000-20,000 crore extra on top of the FY13 number, needs to be put in for the Food Security Bill. The obvious place to cut will be on the fuel subsidy as well as on the fertilizer subsidy. This is the time to bite the bullet and finally going for the urea price hike. Then probably there will be something in the Budget as well.

On that basis the fertilizer subsidy might be budgeted at a lower level. The diesel price hike as rightly mentioned, does not add-up to a very significant reduction in Fuel Subsidy Bill. So, one will obviously require some changes in LPG as well as the year progresses. Let us just hope that oil stays range bound as well as the currency.

Q: If he puts a number of 40,000 crore or 45,000 crore in the fuel subsidy, which what he has put even this time around, after all its cash accounting. It is an election year, let us not forget that. Why would be believe that he will take a midyear fuel price hike?

In August-September, who would have guessed that between September and January we will have so many things passed in the Parliament, so many unpopular decisions taken even at the risk of one of the allies leaving the government.

So, in that sense finance minister has changed this mindset. The initial mindset was that in coalition politics every ally has to agree to a reform for it to be passed. Probably he will change this myth also that in a pre-election year one cannot take difficult decisions.

So, I am betting on him delivering on his fiscal deficit promises. There will be a shock if he does not, but the critical element will not be the 5.3-4.8 because that is probably already there in the market price. It will be more on how he delivers those numbers and what does he do about growth. With growth at 5 percent, it is impossible to deliver fiscal consolidation. So, what is his plan for growth to go up from 5 to 6 to 6.5?

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