Economic Survey: 6.4% growth grand; subsidy tradeoff key, says JPMorgan

The Economic Survey 2013 today pegged growth between 6.1 percent to 6.7 percent. Sajid Chinoy of JP Morgan, however believes it to be a bit ambitious given the higher fiscal consolidation going on in the country.

"People forget that the more fiscal consolidation we do, the more the near term drag on growth even though it is desirable for the medium term. So 6.4 percent growth though not out of possibility seems a bit ambitious," He told CNBC TV18.

He however praised the government's intention of trading food subsidy with oil subsidies. The government has been reeling under high subsidy bills which have created havoc for fiscal deficit and economy in general. While recent deregulation diesel prices is seen as an important step to reduce subsidy burden, new Food Security Bill may again escalate government's subsidy spending. 

Below are the verbatim transcript of his views on the The Economic Survey 2013

Q: What have you made of the statements, inflation 6.2 percent to 6.6 percent, growth assumed at between 6.1 percent and 6.7 percent?

A: I would say slightly optimistic even if you assume an average of 6.4 percent given the range. That projects more than a 1 percent point increase in growth. This is in a year where we expect to carry on with more fiscal consolidation so at least 1.5 percent of consolidation. People forget that the more fiscal consolidation we do, the more the near term drag on growth even though it is desirable for the medium term. So 6.4 percent growth though not out of possibility seems a bit ambitious.

Inflation 6.2 percent to 6.8 percent is possible in March and April, helped largely by very favourable base effects but it is hard to see inflation remaining at these levels until December, particularly if you project a percentage point increase in growth.

None of this is surprising, but I am hoping to see much more on a boosting household financial savings, corporate financial savings, deepening the domestic financial market in the corporate bond market, because ultimately a current account deficit is nothing but a manifestation of the imbalance between investment and savings. We clearly don’t want to push investment down any further so what we have to do is boost savings. So I presume there will be a lot of focus on that aspect but we haven't heard that yet.

Q: There seems to be quite a bit of concern that the food security bill may push up the subsidy this time around and we have been hearing fears about the government using a lot of these tools as their trump cards before the election. In your mind how much of a fear would you assign to an escalated food subsidy bill this time, what is the number that you are looking out for and how much do you think it would limit the fiscal headroom?

A: The government has repeatedly stated that this is a priority for them. It is important that they recognize this in the Budget. So if you are transparent and say we will be pushing in a food security act sometime this fiscal year and here is how much we have budgeted for it, I think that is far better than concealing it.

Our own sense is that given the revised version of food security act on an annual basis, it could add anywhere between Rs 20,000 crore and Rs 30,000 crore to the food subsidy bill, which we expect would be about 75,000 crore this year. Given that this still has to be passed by parliament, it is reasonable to expect half year's allocation for this year. So, it is anywhere between 10,000 crore and 15,000 crore.

However, the important point the survey has said that they intend to accommodate that by trying to wipe out some of the diesel subsidy. So the trade-off is we carry on with the limited diesel price hikes every month. At some point, you might have another increase in liquefied petroleum gas (LPG) prices and you keep the subsidy envelope the same but basically rechange the composition. So you reduce the spending on oil subsidies and increase that in food subsidies, which is deemed a more important moral imperative. I think that is fine as long as you continue this process over the course of this year and the election calendar later in the year does not force you to abandon increasing diesel prices especially if there are fears that oil prices internationally might rise later in this year.