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Last Updated : Jan 25, 2018 05:10 PM IST | Source: CNBC-TV18

11.5% nominal GDP growth, a credible assumption: Sonal Varma, Nomura

In an interview to CNBC-TV18's Latha Venkatesh, Sonal Varma, Chief India Economist of Nomura, Chetan Ahya, Chief Asia Economist of Morgan Stanley and Hitendra Dave, Hd - Global Banking & Mkts of HSBC India gave their views on the upcoming Budget 2018.

CNBC TV18 @moneycontrolcom

In an interview to CNBC-TV18's Latha Venkatesh, Sonal Varma, Chief India Economist of Nomura, Chetan Ahya, Chief Asia Economist of Morgan Stanley and Hitendra Dave, Hd - Global Banking & Mkts of HSBC India gave their views on the upcoming Budget 2018.

Below is the verbatim transcript of the interview.

Q: For FY19, what is a good gross domestic product (GDP) growth to assume for the Budget?

Varma: For the Budget, we are expecting both real GDP as well as the average inflation, GDP deflators to be higher. Our expectation for nominal GDP growth assumption and I would say a credible assumption this time around would be nominal GDP growth of around 11.5 percent. Our expectation for real growth is that it is going to pick up to between 7-7.5 percent in FY19 and on an average, wholesale price index (WPI) and consumer price index (CPI) inflated weighted average we think also will be between 4.5 and 5 percent. So vis-à-vis FY18, where actually we had advance estimate nominal GDP growth of 9.5 percent, a 11.5 percent would be a reasonable assumption.

Q: Your thoughts? Therefore what will be the overall GDP number look like? What is your assumption of nominal GDP for FY18     itself? Afterall, it has been brought down by the Central Statistics Office (CSO), so should we say now our GDP is Rs 165 lakh crore? What will it become, you think?

Ahya: I agree with Sonal's numbers. We expect it to be around 11.5-12 percent depending upon inflation. So that is the uncertain part of it. And also that we do think that there is upside risk to these numbers generally because we getting at the margin from the global side a strong upside in trade numbers which is what is sending upside risk to all the Asian countries including India. So we would say that 11.5-12 percent nominal GDP growth number if the government shows while they are talking about the Budget, it will be a credible number.

Q: The next obvious question is therefore what is the deficit number you are working with and a market borrowing number you are working with?

Ahya: We are operating with a deficit of 3.5 percent right now. We do think that they will need to show higher deficit because there will be an increase in expenditure growth in the coming financial year because it is a pre-election year. There is a possibility that they may show lower than that. We have seen that change in tact by the government in terms of increasing the collection from divestment.

So if they show very high amount of divestment, they can possibly show lower than 3.5 percent fiscal deficit. But at this point of time, we think it would be credible to show 3.5 percent because anything lower than that will be difficult. Even if they show it lower, in the end, they will end up spending, let us not forget, this is the year before elections.

Q: You mean you are expecting a 3.5 percent fiscal deficit for next year, FY19?

Ahya: I think there is a possibility that they may show 3.2-3.3 percent and then in the end do 3.5 percent, but the actual numbers will be known only much later and so, we are not trying to buy that and we just want to ensure that we want to show a realistic number of what is underlying deficit likely to be.

Q: How will the fixed income market react to this? What is prepared mentally for?

Dave: My own sense actually is that if you look at the statements from senior policy makers and you see their actual behaviour, ever since this government has come into existence, I think this is one of the very few governments where cabinet ministers have openly spoken about the fact that if the sovereign itself borrows at 7-8 percent or whatever, it creates a fairly high cost of capital for everybody else in the system. It also creates a debt trap. The Finance Minister himself has spoken about the intra-generational issues it creates, as in we, the current generation want the easy way out so we borrow hundreds of thousands of crore, kids born 10 years from now will certainly be born that much more indebted.

So my sense based on the readings, based on even what they have done just in the last two weeks or so just trying to squeeze out expenditure, trying to do higher amount of disinvestment is that the commitment, both political and economic to stick to the fiscal deficit glide path that they have set is very much going to be their base case trial. Now, the direct tax revenue numbers thus far are holding up quite better. GST is obviously the unknown, but if I had to pick a number, I think it will be very close to the glide path number which is 3 percent as we all know.

Q: If the number on the table were 3.1, fixed income markets would be happy? You think you could see the 10 year contained at 7.4-7.45?

Dave: The fixed income market is no longer in a situation where it is happy about anything unfortunately. So it will be relieved if it is closer to the number which I mentioned or you mentioned which is 3.1. On the other hand, if it is the number that Chetan mentioned, and given the mood and sentiment which I am sure we can talk about later, I think it will be a disproportionate reaction on the negative side.

Q: What do you think the government will do? What they should do, we can go on and on, but what do you think is most likely?

Varma: Our expectation is actually somewhere between what Chetan and Hitendra are expecting. Our expecatation is that for FY19, they will pencil in a 3.2 percent of GDP. Yes, the political compulsions are there but there are a few things to also keep in mind. One is that with the cyclical recovery expected to come through next year actually tax buoyancy will be much better. Second, GST has led to cash flow mismatches in FY18 and that is one of the main reasons apart from the fact that expenditure patterns were frontloaded on why we are facing the fiscal stress for FY18.

Given the tax compliance increase that is going to kick in because of GST, e-way bill, etc. coming in, actually GST collection should also pick up in FY19. Third, the spending on programmes like infrastructure, etc. can still be carried out by complimenting it or supplementing it with borrowing through outside budgetary resources. So you can have government companies raise money and fund capex. It does not need to suffer.

And fourth, in terms of providing the right stimulus to rural areas to address the issue of farm distress, the government can enact policies that have both positive political and economical benefit. So you can have crop insurance scheme, more allocation towards the employment guarantee scheme or there can be measures outside the Budget as well. For instance, we have seen a number of trade policy measures in order to support prices of sugar, wheat, edible oil, etc.

So, all these policies, the fiscal impact is fairly minimal. It does lead to food inflation being a little higher than what it was in FY18 because the government would try to keep farm prices a bit more supported into an election year, but the fiscal implications do not have to be that disastrous. So, I would say that the focus on fiscal consolidation should continue and they should be able to actually show a credible number given the tax buoyancy and other sources of financing that will also be available.

Q: What is a credible tax growth number? The nominal GDP both of you are saying will grow by about 11.5 percent. So what is a good growth assumption?

Ahya: We think around 14-15 percent growth in tax collections will be a reasonable number because there will be an improvement in compliance. At the same time, we do see that the corporate revenue growth which has actually been growing below nominal GDP growth will actually accelerate now and so therefore, you should see a bigger pickup in tax collections. Similarly, corporate profit growth will be much higher than the nominal GDP growth, so it would be getting collections from the corporate front as well which is better than nominal GDP growth. So around 14-15 percent nominal growth in corporate tax revenues will be a good number to work with.

Q: Off balance sheet and other ways of adjusting a borrowing programme, there has been a promise from the RBI that they will relook at the cap on foreign institutional investment (FII) in debt and there is always of course the RBI's open market operations (OMO). What broadly are you expecting in FY19 on these counts?

Dave: I think given the way in which RBI is quite concerned about the significant amount of capital flows are coming in and then the absorptive capacity of those capital flows, our base case assumption is apart from well flagged guideline around the percentage of outstanding government securities which they will keep opening up at the end of each quarter, I personally do not expect any significant relook at that. The ownership now is quite large and therefore, they would want it to be much more fore focused on the domestic side.

As far as the RBI OMO is concerned, and some people do think that part of the reason the fixed income market finds itself in the place that it is, is that on top of a fairly substantial sovereign bond supply, state loans, you have had Rs 90,000 crore of bond sales by RBI as well, nothing would seem to suggest that anything in the liquidity parameter would come to a point where RBI would need to sell bonds again to drain liquidity because that being the primary objective.

In fact if the current pace of increase in currency in circulation sustains, there is a reasonable probability that next year, actually RBI might have to do the reverse as in, undertake some liquidity injection unless on the foreign exchange side they are doing so in insufficient quantities because it does appear that the currency in circulation is increasing at a pace which is much higher than what might have been expected 5-6 months back or so.

Only thing is was commenting was that I think if you look back frankly on this whether they should undertake fiscal deficit or not, whether that should be funded through debt receipts or not which is what borrowings are, if you look back a period of 10 years which is the lowest fiscal deficit numbers was the Budget for the year ended March, 2008 and now you look at March 2018 and then you look at all parameters, whether you look at bank net demand and time liabilities (NDTL), whether you look at GDP, whether you look at tax revenues, revenue receipts, the fastest growth in this 10 year period on a compounded annual basis is in debt receipts.

So seriously, we really need to examine whether just inflating growth through this route is really good because you are creating massive amount of indebtedness for future generations. So when we look at a year on year basis, we are forgetting that for 10 years now we have taken that option and the total deficit actually in states obviously we do not discuss much, but taken together we are the highest in Asia. So if that is not inflating growth, I do not know what an incremental half a percent will do.

Q: Very importantly, we are not discussing debt to GDP enough. Do you want the government to do it? Do you expect they will do it? And will it have a salutary impact on even the cost of money, the cost of capital?

Varma: That is quite an important question and the recommendations of the NK Singh Committee have been in the public domain for some time now. And while the government is likely to deviate temporarily in FY18 because of the GST structural reform, it would be beneficial and helpful if in this Budget itself, the government gives clarity on the extent and the roadmap on fiscal consolidation that they are going to follow, both via in terms of the fiscal flow target on deficit as well as the stock target on the debt to GDP. So clarity on that would definitely help convince investors that the deviation from fiscal consolidation that is most likely has happened in FY18, is a one-off and the medium term commitment of fiscal consolidation remains. So, medium-term roadmaps hopefully does get discussed in this Budget.
First Published on Jan 24, 2018 08:14 pm
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