Last Updated : Jan 05, 2018 07:50 PM IST | Source: CNBC-TV18

Indianomics: Can government stick to its fiscal deficit target?

CNBC-TV18's Latha Venkatesh caught up with Soumya Kanti Ghosh Chief Economic Advisor State Bank of India, Sajjid Chinoy Chief Asia Economist JP Morgan and Samiran Chakraborty Chief Economist at Citi to analyse GDP advance estimate numbers and share their outlook on the Indian economy.

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The Indian economy is set for a slowdown in FY18. The GVA or the gross value added is set to grow at just 6.1 percent-- much below what the street was expecting. Even the Reserve Bank of India (RBI) had estimated GVA at 6.7 percent. This would be the slowest rate of growth of the GVA in the last 4 financial years.

The gross domestic product (GDP) in the current year is set to grow at 6.5 percent-- slightly higher than the GVA-- but even this is the slowest rate of growth since FY14 when the UPA government was in its last year. However, the chief statistician TCA Anant did say that these estimates are on the conservative side.

The Budget had estimated a GDP of Rs 168 lakh crore and arrived at a fiscal deficit estimate of 3.2 percent--- but the CSO is now predicting GDP of Rs 164 lakh crore and this could take the fiscal deficit to 3.3 percent. So fiscal slippage is almost certain.

The one silver lining in the data is the per capita income--- we are now close to the USD 2000 club even though the pace of income growth has slowed down a bit from last year.

CNBC-TV18's Latha Venkatesh caught up with Soumya Kanti Ghosh Chief Economic Advisor State Bank of India, Sajjid Chinoy Chief Asia Economist JP Morgan and Samiran Chakraborty Chief Economist at Citi to analyse these numbers and share their outlook on the Indian economy.

Below is the verbatim transcript of the interview.

Q: Are you disappointed?

Chakraborty: This is very much in line with our expectation. At least the gross domestic product (GDP) number we were forecasting 6.5 percent and this is pretty much in line with that. Yes, obviously as you mentioned, the gap between the 6.5 and 6.1 gross valued added (GVA) is a bit more than what we were anticipating, so we will have to see how much of that is getting created because the Central Statistics Office (CSO) is taking the Budget numbers to be sacrosanct and maybe the net indirect tax collection is arising out of the Budget estimates rather than the trends we have seen till now and that might be one of the reasons why this gap is being created right now. But overall, not too surprised by the headline number. Yes, there are a few surprises in the details for sure.

Q: In that case, more likely the 6.5 percent will be revised lower if the tax collections fail, right rather than the 6.1 percent getting revised higher?

Chakraborty: Yes, that risk is there, but at the same time, we have to see that the second half consumption expenditure growth has been taken to be lower than the first half consumption expenditure growth. And a similar thing is there for trade hotels transport and communication where the second half growth rate is assumed to be lower than the first half growth rate.

My fear is that since we do not have any seasonality pattern in GST collection and both these components will have some amount of GST collection as an input into it, the extrapolation method for both these components might be more difficult than the other components where the seasonality patterns are more well established. So that could be the reason why we are seeing a slightly lower number which will get adjusted through the net indirect taxes. So overall, we are maintaining the 6.5 percent GDP growth, but the gap between 6.5 and 6.1 on GVA is something which we need to look out for.

Q: What would your estimate be? Will the 6.1 percent be an underestimation because afterall, we got a very strong Purchasing Managers' Index (PMI) number of 54.1 in December, we got a very strong truck sales number, some of the core sector numbers like cement were strong, so maybe we will do better than 6.1 percent?

Chinoy: That is possible. Our own estimate is 6.7 percent for GDP and I think there are two differences here between us and the CSO. The CSO at some level has to stick to the budgeted target, so it assumes that the fiscal deficit target of 3.2 is going to be met implicitly and that means that fiscal policy will be more contractionary. We are under the assumption that the deficit will be closer to 3.5, so the fiscal impulse is less contractionary, number one.

Number two, what you point to is if you look at averages over the last seven months, you sometimes tend to miss the fact that in the last couple of months, activity has picked up in a slightly more non-linear manner, particularly exports. So if you extrapolate that forward and given our global view in the first quarter of 2018, we are a little more hopeful on the export front. So if you add these two things together that you are going to get some fiscal slippage which is not good for macro stability, but good for growth as well as the fact that net exports could be less of a drag in the next quarter, we end up with a number of about 6.7.

But let me just step back and make a larger point. I think there are two ways to interpret this number.

Q: Your GVA number would be?

Chinoy: I agree with Samiran. I think the gap between GVA and GDP is very unlikely to be as large as this for two reasons. One is we have not seen the kind of buoyancy in indirect tax collections that had been hoped, but more importantly, remember, oil prices are much higher, so subsidies will be higher in the second half. So it is a double whammy. Not only are net indirect tax collections lower, but subsidies could be higher. So we actually sense that the GVA number could be meaningfully higher, closer to 6.4 or 6.5. but the GDP, the gap between GVA and GDP could be lower and therefore, we have a GDP number close to 6.7.

But, quibbling about 0.2 or 0.3 misses the forest for the trees. I think there are two ways to interpret these numbers. The glass being either half empty or half full.

The half empty part is this was one of the years of the strongest global growth in the current expansion of nine years. Global growth was at record levels and unfortunately, even as every other emerging market accelerated, India has slowed meaningfully, of particular disappointment has been net exports. If you look at the advance estimates, exports for FY18 are the same as FY17, 4.5 percent and imports are 11 percent in FY18 when the economy is slowing compared to 3 percent last year. But this is something we have pointed out before that net exports is the culprit this year and people have different interpretations, we have got our own about supply chains being impacted. So that is the glass half empty.

But the glass half full is whatever you assume for the full year, the second half shows a meaningful acceleration which is the good news here. Even under the CSO's assumption, even assuming that GVA number of 6.1, you are actually looking at second half GVA being 6.4 compared to 5.8 in the first half.

So the good news is sometimes, full year averages are misleading. This was a case of a tale of two halves. The first half was slow, the second half is picking up. Whether we end up with 6.5 or 6.7 is largely irrelevant in the grander scheme of things.

Q: It becomes relevant. I mean, we had 5.7 percent when it was a particularly disruptive quarter. We were on the back of a demonetisation, unusual disruption and we were in the throes of a GST disruption and therefore 5.7. To say that we are better than 5.7 does not seem like a very happy thing to me. 6.1 looks meaningfully lower than the 6.7 that the RBI led us to believe. You think we will do meaningfully better than 6.1 which the CSO has forecast?

Ghosh: No, I also believe that the second half number should be better. Let me just get some small of the statistical irritance out of the way. If you look into the chronology of the CSO estimates last year when I was following the number, last year during the same time when it gave out the advance estimates for last year, then on the last day of January, it revised the number for last year and then after the Budget on February 28, it revised the estimates for the same year.

So this means that this number of 6.5 percent which has been released today has a very small shelf life around two months. So you will see actually this numbers getting revised on February 28 just after the Budget. And I was looking into the numbers, these numbers actually comes on an unchanged base of last year which will get revised on the last week of January. So in my sense, there are a series of estimates which are coming up and this 6.1 percent GVA is likely to move higher purely on the basis of some statistical revisions last year.

The second point which I would like to mention, you were mentioning also in the beginning of the show that the GDP estimates for the Budget was around Rs 168 lakh crore. But this number actually has come down to Rs 166 lakh crore. So basically on that basis and given such a huge number, the impact on the fiscal deficit should continue to remain limited. So it moves up to around 3.29 percent or 3.3 percent. So a slippage of around 5-6 basis points.

So my contention is that these numbers look a little bit on the conservative side and possibly when these numbers come out, you will see a larger revision in the GVA estimates, but possibly the revision in the GDP estimates could be on the lower side. So you could actually land up having a GVA number for the full year maybe at 6.3 and a GDP number which may not be strikingly dissimilar from the 6.5 percent which we observed today.

Q: Now that we have a 6.1 percent number from the most respected statistical organisation in the country, how will this gel with RBI? Already there is an upward bias to the inflation trajectory and then growth is lower, so is this a long pause or in spite of this, is RBI likely to hike? How do you see the central bank?

Chakraborty: Our baseline view is that RBI goes for a long pause, tries to assess that how deep the slowdown is and vis-à-vis how sharp the inflation pick up could be and from where the inflation pick up is coming from. But at the same time, we have put out about a 30 percent probability of a February rate hike also, partly because of the reason that although we are saying that the full year, the number is lower, we are all projecting that second half is going to look reasonably better and FY19 is also going to be reasonably better. So if you look 12 months ahead, the growth outlook, at least the market expectation is that it is not going to be that bad.

So if inflation remains the chief concern and RBI is comfortable that the worse part of growth is behind us then there is a chance that they might just want to do a pre-emptive precautionary rate hike just to ensure that the food price inflation or the fuel price inflation does not get too generalised for other items. But that is still not our baseline view, only put a 30 percent probability to that view.

Q: Do you think that they might revise their GVA number in the coming policy?

Chakraborty: It is possible, but my sense is that as Soumya was mentioning that there would be a couple of more revisions coming to this data very soon, they might want for those revisions to play out before changing their own numbers. They would not have incrementally much information to change their own numbers other than what the CSO says.

Q: What will happen to the fiscal now? Do you think looking at the 6.1 number, the government might slash expenses in the last quarter to try and meet the fiscal deficit? Alternatively, would they not mind swerving from the path of fiscal prudence and announce probably a 3.2-3.3 percent fiscal deficit even for the next year assuming this year comes at 3.5. How does this number change fiscal policy?

Ghosh: I agree with you to your point that this year, 3.2 percent is a goner. I think this year, the deficit could touch 3.5 percent, but there are two interesting points attached to it. Next year, the budget is likely to be presented in July, 2019. Therefore, there is a possibility that this year, the government envisages maybe a deficit which is lower than 3.5 percent and next year, in July 2019 when the new Budget is presented, nobody will remember what was the deficit last time and the markets will look at a new signal. So from that point of view, what is more important is that keeping the fiscal deficit for this year within reasonable levels and not bother too much about the next year because next year all of us know that you are going to start afresh with a fresh Budget in 2019 after elections.

Q: The impact on monetary policy and fiscal policy?

Chinoy: I do not see much impact in monetary policy. I think it is wrong to say India is slowing. The full year growth is slow, but the slowdown bottomed two quarters ago. All of us expect that growth picking up and most of us believe that next year growth accelerates further if for no other reason than global growth is strong and net exports should be a bit of a help. The key risk for me, the key headwind for the RBI is oil prices oil is now at closer USD 68 per barrel. This is a 35 percent increase in the last three months but that complicates monetary policy because, in a way, has stagflationary implications, it hurts growth, but pushes up inflation.

Our bottomline is the RBI is on a prolonged pause because we do see core inflation but still has not reached the levels close to 5 percent that alarmed the MPC. So for monetary policy it is a prolonged pause. In fiscal policy, I do believe, like Soumya, I think the chance of hitting 3.2 is very low at the moment. 3.5 is more realistic. The only piece of advice I would give the government is if you just look at the bond market, this is among the steepest yield curves in the last decade outside of crisis periods. So what the bond market is saying is the absorptive capacity of the market is very limited.

So even if 3.5 were to be reached this year, looking forward it is important that the government have a credible medium term fiscal anchor that the bond markets can anchor towards so that the yields can actually come down. Otherwise, in a way, talking about the RBI at some level is irrelevant. The RBI can cut or raise rates at the short end, but the long end is being driven entirely by fiscal concerns at this point in time and that is what drives benchmark borrowing costs for the corporate sector and the corporate bond market. Therefore, having some fiscal anchor is important.

Q: GVA for FY19?

Chakraborty: We are looking at closer to 7 percent mark for next year.

Chinoy: We have a 0.4 percent acceleration so under our assumption of 6.6 this year, it is closer to 7 percent next year.

Ghosh: We are just looking at around 6.7-7 percent GVA next year.
First Published on Jan 5, 2018 07:21 pm

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