The UPA government perhaps deserves some credit for being able to limit FY14 fiscal deficit below 5 percent – at 4.6 percent of GDP – much better than expected. Six months ago, the economy was in doldrums with the rupee falling to 68.75 per dollar on August 28, a ballooning current account deficit and a fiscal deficit that looked way off the mark. Sajjid Chinoy, Asia Economics, JPMorgan couldn't agree more.
Also Read: Interim Budget: 'FY15 revenue target challenging; see yields at 8.6-8.9%'
Many believe the 4.6 percent figure is more financial jugglery than reality. But Chinoy doesn't think so. "When you look at the quantum of subsidies that were recognized, what's been rolled over to next year is 0.3 percent of GDP, which happens every year," he explains. The rollover, according to him, is not excessively high. He says the government anyways had limited options – either increase non-tax revenues or cut back expenditure. He says this being a low growth year, it obviously translates to low tax revenues. He believes the government did what it had to in order to maintain the sovereign rating.
Finance minister P Chidambaram in the interim Budget presented yesterday forecast 4.1 percent fiscal deficit target for FY15. Chinoy believes this will be difficult to achieve. He says if growth picks up then it'll help, but if it doesn't then the buffer available for next year is not enough. This year planned expenditure was expected to grow at 29 percent, hence there was enough buffer to cut back, but in FY15 it is expected to grow only at 16 percent. He says if tax revenues don’t pick up then there may not be the same amount of non-tax buoyancy. But he feels if the intent is there to consolidate fiscal deficit, then policymakers will find a way.
Vivek Rajpal, Asia Interest Rates Strategist, Nomura talks about the government's borrowing programme and bond yields. He sees yields in the range of 8.6-8.9 percent.
Below is the verbatim transcript of Sajjid Chinoy and Vivek Rajpal's interview with Ekta Batra and Anuj Singhal on CNBC-TV18
Ekta: The 4.1 percent for FY15, there is a lot of speculation on whether that could be achieved or not? If in case it is achievable according to you, do you think that it will be at the same risk of what we have done in FY14 which is pushing subsidies over, etc; your view on that?
Chinoy: Before we jump to the next year let us give some credit to the government for this year. Six months ago nobody expected the deficit to be anywhere close to 5 percent, much less 4.6 percent. So, we have to recognise that in two successive years we have had growth below 5 percent for the first time in 28 years and in that low growth environment this government has delivered a cyclically adjusted fiscal consolidation of 1.2 percentage points of GDP; that is very impressive. So, when your house is burning you don’t worry about the source of the water, you just need water. Six months ago the currency was in a freefall.
Anuj: Don’t you think a lot of this is just financial jugglery? That is something a lot of people are questioning – the quality of this 4.6 percent?
Chinoy: We have to recognise that low growth means tax collections were very weak. If the imperative is you cannot miss your fiscal target because you have got a sovereign ratings downgrade and you can’t affect your tax collections, you can do one of two things. Either cut back on expenditures or raise non-tax revenue. So, that was it. The financial jugglery part I am less sure about. If you look at the quantum of subsidies that were recognised, what has been rolled over to next year is about 0.3 percent of GDP and that happens every year. So, the rollovers were not excessively high. We rely on higher non-tax revenues; that should change. Ofcourse everybody wants better quality of consolidation but in this environment where you had to choose between either missing your fiscal deficit target and risking a downgrade or keeping to your deficit target and doing what you had to do; I would much prefer the later. So, the government needs some credit on that front.
Ekta: What is your view because most of the market is estimating that maybe there could be a spillover from that gross borrowing figure of around Rs 5.97 lakh crore that was announced yesterday?
Rajpal: I think Rs 5.97 trillion number of gross market borrowing is not small in itself. The market was expecting somewhere between Rs 6-6.4 trillion and it has come on the lower side of expectations but the problem is that there is only a limit to which market can react. There are two reasons for that. One reason, this was an interim Budget and we know that the borrowing, etc can look different after the elections. Second, which is more technical is quarter one supply will still be higher. Most of the redemptions of the year are in the first quarter and which means that out of one third of the supply has to come in first quarter of next financial year which is like 2 trillion supply. 2 trillion supply is not less for market to digest. So, it is relatively neutral kind of supply number for the market.
Ekta: What would your near-term range for the yields be at least for Q1 FY15?
Rajpal: Q1 FY15 it would be around 8.60-8.90.
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