Budget 2012: Fisc consolidation on cards, but not too many reforms

However, he isn’t confident of many reforms going through this year.

The author of the Economic Survey today announced the FY13 growth forecast at 7.6% and FY14 at 8.6%, both of which are higher that estimates. “We are more optimistic for FY14 because we believe the savings and investment rate will pick up going forward,” he explained.

Speaking about the RBI’s credit policy, Basu says that the central bank’s decision to keep rates unchanged was expected. “The RBI cut CRR in response to slowing growth, so it will keep an eye on inflation now before it decides to move on interest rates,” he said. However, he says the RBI may start thinking of easing within six weeks.

Below is an edited transcript of his interview with Shereen Bhan. Also watch the accompanying videos.

Q: For FY13 you anticipate 7.6% and for FY14 you are anticipating 8.6%. Now this is higher than what most non-government agencies as well as analyst and economists are anticipating. I know you are basing these numbers on the fact that you hope to see an increase in both the savings rate and the investment rate, but what are you basing that confidence on?

A: Our forecast for 2012-2013 is 7.6%. Here we are actually not relying on an increase in the savings and investment rate. In fact my expectation is that there maybe a slight further slowing down of savings and investment rate. We are growing below capacity, so if we begin to inch towards capacity, there should be a slow recovery. So 7.6% for the coming year is not a very buoyant forecast that I am making and it’s pretty much in keeping with a whole lot of others are saying.

Where we are being more optimistic in the Economic Survey is for the following year, that is 2013-2014, where we are putting the forecast at 8.6%. There we do believe that the savings rate and the investment rate will pick up. Once that happens, and a couple of other tugs and pushes that we are expecting happen, 8.6% is indeed on the cards for the year after next.

Q: What is the downside risk to these growth estimates, especially if I were to talk about oil prices? What is the number that you have factored in terms of oil prices while calculating your estimates?

A: We were using the number that was coming in as we were doing our calculation, and that is close to USD 120 per barrel. If it goes a little bit higher, which it is already is, we will manage. But these are forecasts, we are talking about the future, so if it goes to USD 135 and stays there, our growth forecast will go wrong. Then the whole world will begin to slow down and we will also begin to slow down.

But if oil remains somewhere between USD 120 and USD 125, it will be very difficult for us. That will be the reason why we will not get back to 9.5%. But 7.6% is on the cards if it doesn’t go much higher.

Q: You have shied away from putting down a deficit number. Just for this year, can you share with us what the deficit number is going to be?

A: I can’t share with you that number. Since the Economic Survey gets tabled in Parliament before the Budget, these numbers are not talked about. Keeping with that, I can’t really give you a number. You just have to wait for less than 24 hours.

Q: But just a broad sense of really where you see the fiscal deficit given the imperative on fiscal consolidation as well as the government’s own constraint of trying to cut down on expenditure and subsidies?

A: Yes we have missed the fiscal deficit this year, but we don’t want to give up the mantra of fiscal consolidation just because this particular year has been bad. The Economic Survey says that our medium term and fairly short term target ought to remain fiscal consolidation because if you don’t do that there will be pressure on prices, there will be adverse pressure on growth. So fiscal consolidation remains on the card no matter what happens this particular year.

Q: What could be the actionable levers in order for the government to get back to the path of fiscal consolidation that are politically feasible as well?

A: I can’t tell you about what are the immediate levers that we can act on, but I can tell you that in the long-run that we would have to work towards is India’s tax to GDP ratio. That has gone down compared to where it was three years ago and compared to other countries in a similarly position.

We have to act on expenditure also. In the Survey we have talked about spending money on subsidies, which are important and central for the poor and the vulnerable, but we don’t want to tolerate wastage associated with this. So you act on these and you are going to be moving onto the path of fiscal consolidation, further details you will have to wait till tomorrow.