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Mar 06, 2013, 07.47 PM IST | Source: CNBC-TV18

Budget assumptions realistic; see FY13 CAD at 5%: Moody's

The assumptions made by Finance Minister P Chidambaram in his Union Budget 2013 speech look optimistic and realistic, Atsi Sheth of Moody's Investors Service tells CNBC-TV18. "It is not just revenue growth, but assumptions about subsidy cost are optimistic as well."

Atsi Sheth

Senior Vice President, Moody's

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The assumptions made by Finance Minister P Chidambaram in his Union Budget 2013 speech look optimistic and realistic, Atsi Sheth of Moody's Investors Service tells CNBC-TV18. "It is not just revenue growth, but assumptions about subsidy cost are optimistic as well."

India's growth slowed to a 15-quarter low of 4.5 percent in the October-December quarter lower than the 5.3 percent a quarter ago, and the 6 percent growth seen a year-ago. Chidambaram expects the economy to grow at 6.5 percent in the next financial year.

Moody’s believes that India’s growth in FY13 is likely to be in the range of 5% and for FY14 it would be around 6%.

"Over the next year we are seeing a modest recovery in industrial output. Even though actual year on year data for Q4 i.e 4.5 percent number showed a deceleration on year on year growth, if one looks at quarter on quarter growth there is some sign of recovery," she explains.

Meanwhile, India's ballooning current account deficit is the biggest concern for investors. The rating agency sees FY13 current account deficit at around 5%.

The current account deficit widened to a record high of 5.4 percent of GDP in the September quarter and economists expect it to stay at record high for the entire 2012-13.

Below is the edited transcript of Atsi Sheth’s interview with CNBC-TV18

Q: The Budget has assumed a 19 percent growth in revenues on the strength of a 13.4 percent growth in nominal Gross domestic product (GDP). Do you think either or both of these are achievable?

A: No in fact in our report that we published today morning we mentioned that we think those assumptions are optimistic. This would not be the first time that the Budget assumptions have been more optimistic than reality. It has happened in the past including last year that revenue growth was penciled in at a much higher level than the reality.

It is not just revenue growth but there are other assumptions to do with the subsidy cost and divestment revenues that will be earned, we think they are optimistic as well.  In the past few years the Budget has always penciled in divestment revenues that have turned out to be much higher than what were achieved. There are several areas where the assumptions are optimistic.

Q: What is your own assumption of GDP growth for FY13 as well as FY14?

A: For FY13 we already have the numbers for the first three quarters. We have the Central Statistics Office (CSOs) forecast of 5 percent through FY13, it may be one decimal point above or below. However over the next year we are seeing a modest recovery in industrial output.

Even though actual year on year data for Q4 i.e 4.5 percent number for GDP in Q4 showed a deceleration on year on year growth, if one looks at quarter on quarter growth there is some sign of recovery.

From 5 percent in fiscal 2013 it is likely that growth will move up closer to 6 percent in fiscal 2014, but the Budget expects acceleration much beyond 6 percent, that may be hard to capture.

Q: The Finance Minister in his Google interaction yesterday mentioned that the current account deficit (CAD) is a bigger worry according to him than the fiscal deficit. It is threatening to be over 6 percent in the quarter ended December itself and going by the January trade deficit figures it could be above 5 percent for Q4 as well. What is your sense on the trend that we may see in the CAD itself? Do you see it falling in FY14?

A: We had put out a piece a few weeks ago about the CAD. We noted in there that there were three main drivers of the deficit over FY12-13 and two are well known - oil imports and what commodity prices do to oil imports and second is gold imports.  Gold import has been a resurgent; a new driver particularly over the last year that gold prices have gone up, but gold demand in India has not gone down subsequently.

Those are the two drivers and there is nothing specifically that either the Budget or other policies could do to address it. Although we do think that bringing domestic fuel prices more inline with global fuel prices is a step in that direction because that at least does not subsidise import demand to the extent it did and it will lead to a curtailing of demand in that sense.

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