Budget 2012: Need expenditure-side action for fisc consolidation: PMEAC

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

The Economic Advisory Council to the Prime Minister of India (PMEAC) released its report on the economy today. While that set some analysts to rework their figures, PMEAC's optimistic estimate of India GDP at 7.5-8% for FY13 has drawn quite some criticism . For few others, it is the inflation internals and deficit estimates that are the bone of contention.

Speaking to CNBC-TV18, Saumitra Chaudhuri, Member of the PMEAC says that he is confident of next year being better than the bygone ones. "We will have more traction and we will see the return of investments next year," he says.

With regard to fiscal consolidation, he says that action is required from the revenue side now. The PMEAC report suggests increase in indirect tax rates, decontrol of urea and fuel price hike among others to improve government finances. According to Chaudhuri, the divestment targets will be adjusted depending on market conditions.

"As for monetary easing, that shall depend on inflation and government's budgetary numbers," he says.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: Most analysts seem to believe that the projections are perhaps on the optimistic side. Standard Chartered says to achieve 7.5 to 8% growth the investment to GDP ratio will need to go much higher than 30 %. How do you respond to those reactions suggesting that the numbers you have put out are on the optimistic side?

A: They are very conservative. We had a very bad year this year. We will certainly have a better year next year. As regards to the investment to GDP ratio, I presume reference to the fixed investment rate which is likely to be marginally below 30% or around 30% this year, can be pushed up by 1-2% points to GDP in the next year. Key to issue of bringing back growth in the economy is getting private investment in infrastructure back on track.

There have been many developments, which have hindered the process over last couple of years. We are making efforts and making a change in those circumstances, whether it is availability of coal in clearances, fuel supply grievance or reforming electricity sector distribution side. We will have more traction. We already have got some traction this year and we will have more in the next year. We should see investment returning. Our fixed investment rate will be between 31-32% next year.

Q: People feel on the optimistic side about the inflation number, for FY13 it is pegged between 5-6%. JP Morgan believes that they are not convinced on account of that number because of global crude prices and the possibility of diesel deregulation .You have at the PMEAC called for diesel deregulation if that happens how is that going to impact inflation and hence 5-6% may not be a realistic number?

A: We have had two years of very high inflation. We are going to go on the back of that. If nothing else, it is going to be a base effect advantage. Once diesel prices are raised there will be some impact on prices through the transportation network.

But, as far as other manufactured products are concerned, most of other commodity price increases have been built in. Crude is at a USD 120 per barrel at the moment, Brent may go up a bit, but I don't think this is going to be valid for the rest of the year. Longer probability is that it will revert back to some kind of a mean normal, which is still high.

Q: What you have recommended is that the budget should go in for a hike to pre-crisis levels and do away with whatever stimulus is actually left, hike excise duty rates as well as service tax rates to that 12% mark. Don't you think that, that will crimp growth which is already tempered at the moment?

A: That issue of tax cuts and demand and growth is derived from the fact that demand is being constrained in some way. In advanced economies, demand is constrained and demand growth is very important. In our country, demand is actually ahead of the supply which is why we have persistent inflationary pressures! So, I don't think it will impact the demand. It will perhaps impact to some extent profitability going forward, but do you think it is appropriate that taxes should be detained at a level which was extended during the crisis because the times were difficult, I don't think this should be continued.
In terms of fiscal consolidation, we have to act from both ides. We cannot only act to the revenue side, we also have to act from the expenditure side, we have to put a lid on the way subsidies have grown this year, we need to do a bit of both and I think that will help us bring us back to the path of fiscal consolidation.

Q: What about monetary policy easing. I understand that you believe that there should be a reversal post the numbers that come in February, but how swiftly would you anticipate monetary easing now?

A: Monetary easing is conditional partly on how the inflation number will work out. I think it's been very difficult, it's taken two years for bringing inflation down to this level and I think the final end game has been seen through. Secondly, we need to see how the government budget numbers work out, what kind of borrowing programme is there. RBI will have to calibrate it's monetary policy going forward taking both of these in account. I think inflationary pressures will ease up. You will like to see the proof of the pudding and you will likely see the government borrowing numbers; if the borrowing numbers are encouraging it will make it easier as the government has said.

Q: What about the fiscal deficit target for FY13 given the fact that the government wants to focus on fiscal consolidation?

A: There has to be as I said a bit of both (doing away with subsidy and revenue mobilization). I don't think we are looking at the end of subsidies. We are looking at reduction of petroleum subsidies primarily and looking at some revenue mobilization. I think the combination should result in an outcome where the financing gap is reduced to a significant extent. Exact numbers, obviously, I have no clue. Depending on the market conditions, disinvestment targets can be adjusted perhaps upwards, reducing the government's borrowing programme. We will have to wait for 16th March for exact figures.

Q: You do believe that the economy is looking better?

A: Yes, the reason why we have had a higher number than advance estimates, one, we think agriculture will do better than what they have projected 2.5%; it is likely to be 3-3.5%. We think construction sector has picked up in the second half. Numbers will be better. So they will be marginally higher than the advance estimates. But I think going forward if we can maintain the momentum particularly regarding fixed investment in physical infrastructure for the private corporate-side, I think we can really consolidate growth next year.