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Mar 09, 2012, 10.49 PM IST | Source: CNBC-TV18

Budget 2012: Jim Walker against taxing pvt sector to balance Budget

All eyes are on the Budget now because world fiscal deficit, public debt position and government spending is being watched by everyone says Jim Walker, managing director of Asianomics.

Jim Walker

Founder & MD, Asianomics

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All eyes are on the Budget now because world fiscal deficit, public debt position and government spending is being watched by everyone says Jim Walker, managing director of Asianomics.

According to him. the RBI has been doing a good job of curbing inflation and guiding the government to deliver a credible Budget, so now it is the government's turn. "If the Budget is not credible, then the markets are going to react very harshly indeed," he said. 

He believes taxing the private sector, which is a job generator, is bad way to balance the Budget. "Instead they should look to cut public and government spending," he said.

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

Q: Do you have high expectations from the Budget this time around?

A: I never like to pen expectations on any Budget, not just the Indian Budget though this year really does matter given where the government is coming from. Its track record has been so pure and last year was an abysmal effort in terms of public finances. Everybody has their eyes are on the Budget now and that has been made all the more important given around the world fiscal deficit, public debt position and government spending are everything that everybody is watching these days. This Budget takes on a measure of untold proportions with regards the importance to the markets this year.

Q: Leading up to the Budget, the action from the government over the last couple of months, does it inspire any confidence in you? The policy paralysis which you alluded to might be on the wane and the government might be just trying to get its act together?

A: I am yet to be convinced that the government is even thinking in terms of fiscal consolidation which would be in our view getting its act together. The market was certainly oversold on India as we would enter the end of the year and our PE was way, way oversold. Of course the RBI made things much better by relaxing the conditions over non-resident Indian deposits and that saw a flood of money coming in which then again assisted the market. So the oversold position in the rupee tended to disappear and the oversold position in the market was also disappearing.

But I am not sure that had anything to do with the government or any of the issues that the government has talked about over the course of the last two months. It says a lot about losing sleep over fiscal positions. But we really havenít seen very much in the way of coordinated action of it doing anything about it.

Q: Do you think itís a problem of intent for the government because the new hope is that post the results of the UP elections the government which has been so far hamstrung by its coalition allies will be in a much better position to go ahead and implement some of the stuff that itís been talking about. Do you think thatís just wishful thinking or there is a grain of truth to that?

A: No, I think itís an excuse using that get away of GL3 card for Congress. It says that itís been hamstrung by its coalition partners. Thatís nonsense. Of course what has been hamstrung is bad policy decisions over the course of the last three years. It hasnít been on the top of the job, thatís all there is to it.

Now it seems to think that because of the results of a few state elections due weekends then we are all of a sudden going to see a change of heart at the governmentís core level. I really wait to be convinced though in that. There seems devoid of ideas about what needs to be done to approach fiscal consolidation and quite honestly as far as the entitlement programs are concerned all they talk about is extending them rather than actually ending or reducing them. I am afraid thatís required as well and foreigners are going to be watching that with keen eyes.

Q: For a lot of people you are right, the make or break number is the fiscal number, the deficit number and what it is set out for in FY13 given that the government is likely to overshoot last yearís target by quite a margin. What do you think will be the communication from the FM on the deficit figure you think?

A: I have absolutely no doubt that the communication is going to be that the deficit will be lower in FY13 than as in fiscal year FY12. But of course it was supposed to be lower in FY12 than it was in FY11 and thatís been a pretty bad job because itís going to be significantly higher. Unfortunately given our backdrop where we expect economic growth to continue to slowdown and itís already disappointing. Peopleís expectation we have just had the latest GDP numbers at 6.1%.

Our view is that the FY13 numbers are likely to drop into range of between 4% and 6% given that investment pipeline is very weak, just now interest rates remain very high and the outlook for Europe is absolutely abysmal. So with that we expect much lower growth and if the government is going to say to us that itís looking for 8% or 8.5% or 9% growth next year to get fiscal target they are significantly lower than the deficit in FY12 then we just arenít going to believe it.

Q: Thatís what I was going to ask you. Do you think having been beaten once last year with the projections and then the actual reality the market, will you actually be very skeptical about these kind of targets and growth assumptions or do you think the markets are in a different zone right now fueled by liquidity and it may choose to actually believe and go with what the FM is saying?

A: I think the liquidity rush is just about overly done and I think we have seen that over the course of the last couple of weeks not just in Indian markets but globally. If you look beyond the S&P 500 and the Russell 2000 in the US had steadily beginning to lose ground and it looks as if it is just about to roll over.

Europe is really the limits of all the enthusiasm for LTRO and the various ECB measures. The emphasis is on the government this year to deliver credible fiscal targets and a credible fiscal policy and that means putting together a scenario where economic growth is going to be modest in the next year to two years, assuming the growth of 24 months and the figures that they have for subsidies given where oil prices are and the other parts of the Budget are credible. Last year they werenít credible and this year if they are not credible then the markets will treat the Budget harshly indeed.

Q: On the deficit number some people are hoping that he might attempt something like a smart or strong subsidy reduction plan, maybe with fuel price changes, etc. Do you think those things are likely at all this time around?

A: We canít hope. It would certainly a step in the right direction that we are moving the subsidies and of course eventually going over if needs be to direct cash payments to poorer people. That would be the step in the right direction that all of us are looking for in India.

There seems to have been a very difficult job to get these subsidies off the way whether it is oil products subsidies or fertilizer or indeed food subsidies. All of them are still there; all of them are growing so far. Given whatís happening with the oil prices at the moment and some pretty severe steps to reducing the oil subsidies. I suspect that they are going to be higher by the end of next year.

Q: If the government does some kind of eyewash in terms of the deficit number with no concrete steps to cut subsidies but putting out high growth assumptions and high disinvestment targets - do you think it might stay in the Reserve Banks hand in being able to cut interest rates as the street expects it to during the course of the year?

A: Yes indeed. I think the Reserve Bank of India who has been very clear over the course of the last few weeks and what it expects from the governor, through deputy governor and spokesmen generally.

Again the RBI is doing an excellent job in trying to move India in the right direction, move the government in the right direction. It is very clearly said that if the fiscal consolidation is not credible and is not put through in a way that is believable in the Budget then they wouldnít be able to continue with interest rate cuts that everybody is expecting because that fiscal deficit is indeed an inflation generator and RBIs job is to tame inflation.

So itís really all in the governmentís hands, a credible job this time and we wouldnít just have the positives coming through from fiscal consolidation but we will be seeing some real monetary policy easing to go along with it. So the government has all to lose or all to gain at this point - can come out looking very smart if it makes the right moves in March and can come out looking very stupid indeed if it starts to trip up the possibility of interest rate cuts.

Q: Another issue is what the government may have to do in terms of raising taxes whether its excise taxes or service tax in order to contain the fiscal deficit. But given that growth is flagging, do you think (a) it will do that and (b) if it does, how will it go down with the market?

A: I hope it wouldnít go down that route. So was the second best option to raise taxes to try and balanced fiscal positions. When the government raises taxes, it just means that the private sector has got less to spend. In India the private sector is the real job generator in the economy. So anything that cramps the ability of the job generator to grow and create those jobs is a negative eventually for the country.

The right way to go about fiscal consolidation is through disinvestment and cutting spending. Also to get rid of corruption at the heart of the programs if the money doesnít reach the people where it is supposed to reach, have just wasted money and its taking money off the private sectors pocket and putting into to local politicians and national politicians pockets. They donít spend the money very wisely. So letís be very clear - taxes are a bad ways to balance the Budget. Cutting spending is the good way and thatís what we will be watching for.

Q: You touched upon divestment. What do you make of what the government is trying to do desperately now with offers for sale, cross buybacks between PSU companies? Are you a votary of that?

A: I am in favour of anything that takes industry off the hands of government because quite honestly the government doesnít know how to run anything. It really isnít good at administration or running industries. The private sector makes much better job of that and anything that goes along with those lanes has to be supported. I think there is plenty of ways to divest some of the PSUs into the private sector in a way which would be even more efficient than cross shareholdings and looking to try and consolidate in the PSU front. I think just selling off those assets would make much more sense.

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