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Aug 07, 2012, 01.14 PM IST
Taimur Baig of Deutsche Bank says, India is in urgent need of fiscal consolidation. "Right now, the fiscal situation is under great deal of stress. We have revenue weakening because of weak economic activities. We have expenditures rising. Fiscal consolidation is clearly needed expeditiously," he elaborates.
Yesterday, a lot of positive statements, intent came out from the new finance minister P Chidambaram .
In an interview to CNBC-TV18, Taimur Baig of Deutsche Bank says, India is in urgent need of fiscal consolidation. "Right now, the fiscal situation is under great deal of stress. We have revenue weakening because of weak economic activities. We have expenditures rising. Fiscal consolidation is clearly needed expeditiously," he elaborates.
Below is the edited transcript of the interview with CNBC-TV18's Gautam Broker and Ekta Batra.
Q: What exactly did you make of all of these statements? What is the first big and most important step that the market needs to see with regards to action?
A: I think the statement was welcomed. But it is a statement. These are intents. We need to see these statements and the expressions of reform in the context of the political reality and the economic reality.
The fact of the matter is, right now, the fiscal situation is under great deal of stress. We have revenue weakening because of weak economic activities. We have expenditures rising as we start worrying more about the costs of subsidies, whether it is food or fuel, due to the drought situation as well as due to the fact that the commodity prices have begun to rise. In rupee terms, they have been exceptionally high in any case.
Clearly, the finance minister has his hands full in terms of just focusing on the budget and coming up with an outcome that is consistent with what the market is expecting, no more than 5% of GDP deficit. As you saw from the speech, there is a lot of plan to consolidate expenditure, to address the subsidy question.
We have to see whether politically there is room to carry out fuel price increases or some tax administration measures to improve revenue generation. We also have the rating agencies breathing down the neck of the government of India. The country is on a negative outlook. So, fiscal consolidation is clearly needed expeditiously. We are off to a good start with the statement. But now we need to see how things pan out in reality.
Q: Last week, we had the IMD officially declare a drought. Do you think most of that is already priced in? The street is working with somewhere around 5.8%, even Montek Singh after the IMD statement said that if it indeed turns out to be a drought, we could see a 6% growth figure. Do you think all of that has already factored in or there is still some room for a negative surprise or downgrades?
A: Our own research shows that agriculture output has not as much of bearing out of rainfall that it used to be. A lot of the crops have now grown during the winter season. There has been some marginal improvement in irrigation. So, when we say that 60% of the land depends on rainfall, we are not exactly saying the relevant fact. The relevant fact is agricultural share of India’s GDP is smaller than ever and dependency on rainfall is also smaller than ever. Now, that is one side of the story.
The other side of the story is rainfalls impact on inflation. So, the cloudy outlook on what happens with cane production would certainly have an impact on food prices. We are already seeing that. So, we have a growth implication issue. We are not that worried about it. Growth will be in 6-6.5% region, in our view, regardless of what happens with agriculture.
But inflation implication question, in our view, is much graver. We also saw the RBI revise up its inflation forecast for March 2013 to 7%, which I think is build around the expectation that food prices will firm up from here onwards. So, these are two-pronged risks that we are dealing with.
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