In an interview to CNBC-TV18, Sonal Varma, Executive Director and India Economist, Nomura says she expects the subsidy bill to be flat and will be watching the composition of expenditure.
In an interview to CNBC-TV18, Varma says she expects the subsidy bill to be flat and will be watching the composition of expenditure.
She expects the government's net market borrowing for FY17 to be around Rs 4.8 lakh crore and gross borrowing to be around Rs 6.5 lakh crore.
Below is the verbatim transcript of Sonal Varma’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What should be the legitimate or realistic revenue assumptions, tax growth assumptions and what kind of a market borrowing will the market not sulk about?
A: The first thing here is the fiscal deficit number which we think will be about 3.7 percent of gross domestic product (GDP). Now, backing that estimate out on the expenditure and the revenue front, on the revenue side one, the disinvestment target that they set will be important. We had set a target of Rs 70,000 crore of target but the actual collections there will be about Rs 20,000 crore. However, what did not happen this year and which might happen next year is the strategic stake sale. So, we think the disinvestment target maybe set at around Rs 50,000 crore.
Second, on the tax revenue assumptions, the big change we are expecting is really service tax hike to 16 percent from 14.5 percent and some rationalisation on the corporate tax front, plus of course not to forget that the government will continue to get increased excise duty on account of the petroleum excise duty hike that they have been continuing. Therefore, we think on an aggregate more realistic tax revenue growth target could be around 18 percent or so primarily driven by higher tax buoyancy on the indirect tax front.
I think the big thing that everyone will be watching is the composition of expenditure, what happens to capital expenditure as a share of GDP. Last year it was increased from 1.5 percent to 1.7 percent and therefore what happens to revenue expenditure as a share of GDP. Our expectation is that it is going to go up from 11.1 percent to about 11.5 percent of GDP because of the 7th pay hike and the increase in the wage and the pension bill.
Finally, the market borrowing number in this financial year, the government will do net market borrowing of roughly about Rs 4,40,000 crore. Next financial year our expectation is that the proportion of fiscal deficit finances through market borrowing goes up from 82 percent to about 87 percent. So, we are expecting a net market borrowing of about Rs 4,80,000 crore or thereabouts.
Sonia: In rupee terms, how much has the government benefitted from the fall in oil prices, as far as the deficit front is concerned and will that be able to off-set the kind of subsidies that the government has to pay in terms of food and fertilisers?
A: The total gain on the excise front because of the petroleum excise duties in FY16, our expectation is it is going to be about Rs 90,000 crore and some of these duties were also hiked in early 2016. The full benefit of which on an annualised basis actually will be seen in FY17 provided of course these duties are not reduced.
So, the Rs 90,000 crore benefit that they have got this year, our estimate is that in the next financial year, they will actually get close to Rs 1,50,000 crore just from the excise collection on petroleum, which actually stands at about 1 percent of gross domestic product (GDP).
So, does this offset the increased subsidy allocation? The petroleum subsidy in any case has come down. Fertiliser subsidy has been quite high actually, at Rs 70,000-75,000 crore and the expectation is that on the food subsidy front, since the Food Security Act is going to be now applicable to almost 27 states, the total burden there will go up. However, on the whole, as a share of GDP, our expectation is that the subsidy bill will actually be flat.
So, most of the additional excise collection that they will be getting next year, will partly go into deficit reduction and will partly go into the pay pension hikes that the government will probably announce.
Latha: If you say Rs 4.8 lakh crore is the net borrowing, what is the gross borrowing? The debt markets were saying that anything above Rs 6.3 lakh crore will be very difficult for the market to digest. What is your gross borrowing number?
A: The actual outstanding redemptions are about Rs 2,06,000 crore for the next financial year of which there could be some amount of buyback and debt switch. Our overall expectation for the gross borrowing is about Rs 6,50,000 crore. So, we are expecting a number greater than Rs 6.3 lakh crore which you are saying is what the markets are expecting.
However, incrementally now, the focus has turned into what states are also doing, purely from the point of view that state borrowing this year, has been close to Rs 3 lakh crore which is a jump of 25 percent year-on-year. So, market concerns are coming not just from the centre number, which is actually, if you look at the net borrowing number, it used to be Rs 4,60,000 crore, a year and half, two years back. It was about Rs 4,40,000 crore this year. However, the real delta in the borrowing is now coming from states and that is causing some concern for the market.
Latha: The other number, what is the nominal GDP number you will be comfortable with?
A: This year, nominal GDP growth obviously has come down quite significantly. It is about 8.6 percent growth. For next financial year, even if commodity prices stay here, the extent of deflation in wholesale price index (WPI) inflation should basically go off. So, the average WPI inflation in FY17 will be higher.
Also, if the Pay Commission is implemented, then the housing component of consumer price index (CPI) will go up, and therefore, the average CPI inflation in FY17 may also be higher. So, the GDP deflator itself is going to be higher. So, a number of around 11-11.5 percent, maybe around 11 percent or so, should be comfortable.
(Interview transcribed by Priyanka Deshpande and Stanford Masters)