Indirect Taxes: Yes Bk sees hike in indirect tax; upside risk to inflation

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Shubada Rao of YES Bank tells CNBC-TV18 that upside risks to inflation still remains for our economy. She sees inflation coming in at 6-7%. "Pressure on food prices is likely to continue," she says.

According to Rao, it is not right to expect such high fiscal consolidation in one year's time. "We are yet to see investment-led growth in India," she says.

Rao says that a hike in indirect tax rates can be expected soon

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

Q: Are you in the camp that believes that the PMAEC's projection of 7.5-8% FY13 GDP growth seems doable or do you believe that they have been a tad too optimistic specially on inflation and current account deficit; the GDP number one can still understand perhaps doable but on the other internals?

A: I think broadly we are in line in terms of at least the GDP projections. We do see a marginal improvement going forward in the forthcoming fiscal year, the reason being in terms of some improvement in the investment climate, as also consumptions which had been suffering over the last two quarters also showing some recovery. So in terms of GDP, we are quite in line with the estimates; we are at 7.4% for the FY13 and at 7.1% in the current year, we are quite in sync with what the PMEAC has to say.

As far as inflation is concerned, it seems difficult to achieve a sub 6% kind of a target. I would believe that upside risks on inflation continue to remain, be it through oil prices, suppressed inflation domestically as a result of wage and also some kind of a base effect wearing off. What happens if we do not have agriculture output which is in tandem with expectations especially when the food security bill is going to be on anvil, so there would be pressure son food prices going forward, there would be pressures through oil. Overall, I think inflation would correct from 9% average range to about 6-7% range. There is a correction of 200 basis points, but the upside risks remain.

Q: The Finance Minister is constrained by way of revenue mobilization. You can continue to talk about expenditure control, cutting down subsides, disinvestment proceeds, but the fact of the matter is all of this was talked about last year as well and look at where we stand today. Given this context, the economic as well as the political context what can we really expect in terms of fiscal consolidation and what will that translate into then as far as the fiscal deficit number for FY13 is concerned?

A: The task is going to be seriously uphill of even expecting a dramatic cut in a fiscal deficit ratio. While quite right, the challenges are going to be many in terms of being able to raise the revenues, we could expect a nominal GDP growth of a 15-16%. Therefore some revenue buoyancy could be looked at if recovery does indeed take shape in terms of a 7.5% growth in real terms what really would need to be done is broadening of services tax base. Also restoring some of the tax rates, which have been lower because of inflation management issues. So, we could expect some uptake in indirect taxes and tax rates.

As far as the disinvestment programme is concerned, there has been enough material to go by in terms of laying a thought through roadmap for disinvestment over the five years. We need to look at more not just from adhoc-approach to more a systematic approach over the five years. Subsidy management is going to be even more challenging. We cannot expect a fiscal correction of such a sharp magnitude in just course of one year.

If we were to look at a fiscal deficit number, realistically speaking this year of somewhere between 5.9 to 6.2%, we should not be realistically expecting it to cut at 5.1% or thereabouts. It won't be something that would be believable. We could look at somewhere around 5.5%. What really needs to be done is an improvement in the subsidy distribution.

Q: What about monetary policy and monetary easing? What do you see happening as far as the monetary cycle is concerned?

A: Putting it in the context of what the advisory council reports says, quite clearly monetary policy has begun to do its bit in terms of demand and its correction getting lower. Essentially, the thrust has to come from the fiscal side, fiscal consolidation is the top most priority. Having said so, we still need to see growth led by investments and that to my mind will come about with more monetary conditions easing.

To start off with, we did see a CRR cut. Given the tight liquidity conditions in the economy currently and OMOs on the table we do not rule out a CRR cut as well getting announced in the forthcoming review of the monetary policy. But more importantly as far as the rate cycle is concerned, we perhaps have been slightly more aggressive in our expectations. We are expecting a rate cut in March. The Budget is getting announced one day after the monetary policy review, but needles to say RBI would have a fair sense through its government borrowing program as what the fiscal number is going to be. So, RBI could start cutting rates by March 15 policy.