Economic Survey for FY18 has been tabled in parliament. The government expects the Indian economy to grow by 6.75 percent in the current fiscal and between 7 percent and 7.5 percent in the next financial year. Last year's survey had projected a growth of 6.75 to 7.5 percent for FY18. The Economic Survey, authored by Chief Economic Adviser Arvind Subramanian is a review of the key developments witnessed by the economy in the last twelve months. It also serves as a precursor to the Union Budget, which shall be presented on Thursday.
In an interview with CNBC-TV18, William Foster, VP Sovereign Risk Group at Moody's Investors Service, Leo Puri, MD of UTI Asset Management, Jahangir Aziz, Asia Economic Research at JP Morgan, Geoff Lewis, Global Strategist, Capital Markets Group at Manulife Asset Management, Naina Lal Kidwai, Chairperson at Max Financial Services, Arun Kumar, Chairman & CEO at KPMG, Shobana Kamineni, President of CII, Soumya Kanti Ghosh, Chief Economist at State Bank of India (SBI) and Rashesh Shah of FICCI shared their views and outlook on the same.
Below is the verbatim transcript of the interview.
Shereen: Let me start by asking you because one of the highlights of this economic survey is what it talks about in terms of the fiscal consolidation roadmap. How do you read what the survey tells you in terms of the fiscal consolidation roadmap?
Foster: Given the fact that Goods and Services Tax (GST) and demonetisation were disruptors to the economy, collections around GST and integrating smaller firms has been a bit more difficult than the government would have liked. As a result, we have expected some slippage in terms of tax collections resulting in what we expect to be more of a - just around 3.5 percent of GDP at the central government level and 6.5 percent for the combined level. That sounds somewhat consistent to what we are hearing.
Moving forward, I think what is most important is that based on this you are being sort of an exception because of the disruption with reforms particularly on the revenue side that the government remains committed in the future to fiscal consolidation and the roadmap that is feasible, credible, and over time will bring down that large debt burden. We believe that that is indeed what the government maintains commitment to. The composition of spending will be very important too because that will help with that overall objective and optimize the expenditure. However, on the revenue side, I think another thing that the survey focused on was the fact that there is a clear formalization of the economy going on which moving forward will do well for revenues.
Shereen: If you are factoring in 3.5 percent is the fiscal deficit target for this year, what about next year, what is the target now in light of what we have seen and heard for FY19?
Foster: We need to see what the Finance Minister says in the Budget speech. However, the expectation is it will continue to maintain a path, fiscal consolidation, the exact numbers obviously we do not know right now, but over time it should be a steady downward trend.
Latha: Putting these two together, that if indeed personal income tax is ticking higher and states are better off, there is even less excuse for not doing fiscal consolidation, isn't it? What would your response be if inspite of this, fiscal deficit was pegged at 3.2 percent or even higher for next year?
Puri: I would say unequivocally that it would be a really bad idea to go down the path of starting to justify fiscal slippage. I think it is alright to perhaps argue that maybe we missed a month of revenue collections because of GST implementation but we are highly committed and demonstrate that in the Budget. However, I think it would be extremely complacent, if not dangerous, to go down the path of saying we are now going to favour growth over fiscal probity.
I don’t think India is in a position to do that. I think we will be throwing away several years of hard earned credibility. I think as global markets weaken, as they inevitably will over the course of the year, we will be severely punished if we actually let go off that credibility.
Latha: Your fund managers manage a lot of debt funds as well, and they must have been ravaged by the manner in which the yield curve has steepened. Do you think that if we let go off our macros, we may even endanger the flows, both FII and domestic into funds?
Puri: Fortunately our managers had anticipated in a somewhat contrarian way, hardening of rates. They have not been riding the curve downwards at all. They were not surprised, but clearly there would be a high degree of disappointment in financial markets amongst institutions, both in India and globally. We had signaled that we are taking a more relaxed view towards fiscal consolidation; we have heard many voices arguing that somehow that might be acceptable given the stage of development in India, given the need for stimulating growth, but pump priming at this point, cannot be a substitution for retaining this very hard earned credibility in an environment that carries tremendous risks which the CEA himself was underlining. I think we should certainly not ignore his strong reference to the risks that he has highlighted.
Shereen: Let me address the issue of growth. There is a pickup in growth that the survey factors in to between 7 and 7.5 percent in 2018-2019. However, it also goes on to talk about how the twin engines that propel the economy in the mid-2000s whether it is exports or investments, they continue to run below the take-off speed. In fact the survey goes on to say that corporates have not raised commensurate amounts of capital suggesting that their investment plans remain moderate, private investments while seem poised to see rebound will depend on resolution as well as recapitalisation. So where does that leave a) the growth picture as well as the private capex picture?
Kidwai: If you look at the forecast, 7-7.5 percent, that is quite a wide band and clearly not a robust enough growth for a country like ours. So it cautious, and it is cautious exactly because of the reasons you mentioned – export numbers not measuring up, investments while green shoots are beginning to emerge, it is very slow and needing a lot of nurturing. So, the fact is that, yes, the trend is positive, but it is not a robust positive as India might have expected given the success of the GST, because we all hope that GST would lead to at least a 1.5-2 percent growth going forward. Clearly that is slower, both because of the operational issues and also because of the way the rate structure is coming through.
So it is realistic; I don’t think 7-7.5 percent is a stretch, I think India will get there, the trends are there, but we do really need to say how prime the economy to do better going forward and that will have to come from encouraging investment and from giving a good hard look and push to exports more so because of global headwinds and some of the factors you mentioned on oil prices going up because our current account deficit looking very strong thus far begins to feel the pressure of a higher import bill. So we do need to get our exports going again.
Shereen: Just on the issue of exports becuase through the survey there is a lot of consideration on reviving export growth and I want to pick up in particular what the survey says in terms of manufacturing. While the manufacturing share of GDP has improved slightly, there has been a decline in manufacturing export to GDP. Of course it talks about the real effect of exchange rate (REER) which is appreciated about 21 percent since 2014, but it asks the question, do export incentives work and it gives the example of the Rs 6,000 crore textile package to suggest that yes they do. Now the Commerce Minister has also been batting for export incentives in this Budget, my last conversation with him again he reiterated that these should not been seen as subsidies, but these should be seen as productive incentives for growth. Given what we have seen in the survey, what would your expectation be from the Budget when it comes to the export led sector?
Kumar: It is difficult for me to hazard what the Budget would say, but what I would say is that this is a very positive fact brought out by the survey that there has been an increase in exports and that is partly fueled by the global uptick in economic conditions. The other part that I noticed was that, the states that export internationally and interstate are particular beneficiaries in terms of employment and economic growth. The ones that are exporting internationally, are doing even better than ones that do interstate. So I thought the lesson from that is that it is important to focus on increasing exports. States should get engaged in increasing exports and you can see that four or five states actually undertake most of the exports.
Second aspect is that most of the export increases came from MSMEs which are actually big employment generators in the economy. So the more exports can rise, the more employment will be created.
With regard to your question on manufacturing, it is a difficult question which seems to mean that the GST which will make logistics easier in the country, and the increase in investment infrastructure, will both contribute to more comparative supply chains and more comparative manufacturing.
Latha: The CEA has made a very strong argument on why India did not participate in the global growth. 2017 was a period of synchronous global growth of Europe, Japan and of course the United States but India did not participate and he blames this on one high real rates, not in keeping with the way global rates were falling in late 2016, he blames it on goods and services tax (GST) and demonetisation related disruptions and finally on the twin balance sheet, he says now all this is behind us and we should be able to grow with the world. Do you buy this? Do you think all this disruption is over and now we will fully be able to participate with this synchronous global growth?
Ghosh: To some extent, I should agree with this point. I think that the green shoots were finally beginning to play out more positively.
The other things which I would like to mention now in fact the historical trends suggest that in those golden years of 2005 and 2007 - India is witnessing 9 percent growth rate and global exports the way they are moving right now whenever the global exports go up, Indian exports also go up but with a multiples of that amount. So basically, I think now the time has come, we had 12 percent export growth last time and even 30 percent before that and I think that last three months of the year are always good enough in terms of an export growth. Hopefully, if the global exports continues like this which is likely to be in this calendar year, Indian export could stage a strong revival and that could be the starting point of a better growth number going forward.
Latha: Would you agree with that? You think exports look poised to recover?
Kumar: I think the global economy seems to look in a very good shape.
Latha: Global recovery is 12 months old and our exports have not chimed in, only in the last three months, we have shown the three-months average is now risen to about 12.5 percent export growth, are the companies you interact with telling you that they are over and done with the disruptions and supply chains and now they can participate?
Kumar: Now the companies we work with certainly see that the disruptions caused last year are behind. They also see that they are now focusing on growing. So that is a general trend that we see. Certainly, companies here, we see them focusing more and more on growth. People feel that overcapacity is coming down. We also see that the commodity cycle is picking up in a favoured way so remaining reasons are going to drive growth.
So I think that growth will also come with driving exports, so the focus on exports.
Shereen: One of the cautionary statements coming in from the CEA also had to do with the rally that we have seen in the Indian stock markets and he says that the Indian stock market surge is different from that in advanced economies in three ways, growth momentum level and share of profits and critically the level of real interest rates, by that token, India’s valuation should be much lower. So he is saying that if growth doesn’t pick up then we could be beset with the possibility of a correction in the Indian stock markets, how would you read what the CEA has said with respect to the difference in valuation and growth expectations to do with the markets?
Lewis: I think that is right. If you look at the earnings expectations built in to the market, the consensus is for very strong growth. There has been some disappointments, it has been late in coming but it now looks as if the disruptions to the real economy. So we are looking for a pickup also in India’s GDP growth over the next 12-18 months. I think if it doesn’t come then quite likely the Indian stock market would suffer a significant correction.
Shereen: What is your own sense given what we have seen on the earnings calendar so far, have you been given more reasons for disappointment or have you been given more reason for cheer?
Lewis: I think it is early days. I think we are still not convinced. So we are looking for an inflection point. We think it will come through. So I think a lot of foreign investors are in a similar position. So what we are looking for India to deliver in terms of earnings and profits growth as the economy recovers through 2018.
Shereen: As a foreign investor what are you going to be watching out for when the Finance Minister (FM) presents the Budget on February 1st?
Lewis: Continuity of policies, market friendly policies, continuation with financial reform, with reduced non-performing loans (NPLs), commitments to privatisation, basically continuation of the policy agenda of the Modi government, they are doing a pretty good job at the moment and I think that now some of the short-term hiccups are through, looking at GST, I think the full efficiency benefits is something you will only find over the medium-term but it certainly sounds as if we are good enough to a good start.
Shereen: The survey makes it clear that the private investment continues to be moderated, it is yet to pick up and it will depend to a large extent on recapitalisation as well as correcting between balance sheet problems. Given the context of what the survey says and it very categorically states that the upmost priority must be given to social infrastructure things like education, health and social protection, do you believe that that corporate tax cut that you are expecting and you are very clearly betting on is likely to come through?
Kamineni: I believe that for two reasons, one is that this was something that the government has delivered on most of the promises they have made over the last three years in terms of what they have stated in the Budget but the last one is the reduction of corporate taxes. So that is one reason. The second reason is that if you see the economic survey, they have said that they have used big data and using that analysis, they have seen that they have a 50 percent increase in indirect and direct taxpayers. So this gives hope that the benefits of GST will come in and the collections will definitely start to improve as they have done in direct taxes. So yes, I do feel hopeful.
Shereen: The survey says GDP will grow up to 7-7.5 percent next year. Is that a disappointment given the very high earnings growth expectation that the market is factoring in?
Shah: I think a lot of people were converging around 7.5 percent, which I think is okay because we are still coming out from the impact of demonetisation, GST and all. So I think 7.5 is not bad because what we look at is also more at the nominal GDP growth. So if we take 7.5 and expect inflation this year to be around 5 percent, so 7.5 plus 5 will give us a nominal GDP of about 12.5 percent, which is almost 200 basis points (bps) growth in nominal GDP over FY18, which is not bad news.
Latha: The other big elephant, which the CEA always addresses are the macros, he says eternal vigilance is needed to ensure that India’s macros are not hurt especially in the face of higher crude but he also says that fiscal consolidation there is a time for it and he almost prepares you to expect a bit of fiscal looseness, do you think fiscal prudence is all important in the coming year, in FY19, how bad will it be if they slip a bit?
Shah: It is an important question and I think amongst all the trade-offs that the FM will have to make, this is going to be an important one. I, for one, believe that a value between 3.2 between 3.5 the investors will be fairly okay because given the oil price issue and as you have seen the bond market is already priced a little bit of that in. So it is more or less in the price and I think anything above 3.5 will come as an unpleasant surprise but up to between 3 and 3.5 people will take it as a matter of course and understand. I think it will be more important about that even if the fiscal slips a little bit, what is the reason for that slipping. Is it for more growth oriented investment, maybe cutting the corporate tax rate, all those are more acceptable trade-offs for the government to make.For entire discussion, watch accompanying videos...