Interim Budget: 'FY15 revenue target challenging; see yields at 8.6-8.9%'

Below is the verbatim transcript of Leif Eskesen and Gangadhar Darbha's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What have you made of the Budget numbers? Do you think you can believe the 8 percent revenue expenditure growth as well as the 19 percent tax growth for FY15? Do you have some doubts over that 4.1 percent fiscal deficit as some economists have been telling us?

Eskesen: Absolutely. I think these are rosy assumptions for tax revenue growth that you have there. If you look at their own underlying assumptions for nominal gross domestic product (GDP) growth, it is quite low, 11-12 percent thereabouts as far as I recall from the documents. Then you have 18 percent growth in nominal tax revenues that assumes very significant tax buoyancy which is often used as an assumption of that and that is clearly too optimistic. I think that will be difficult in addition to that.

We also, at our house, are looking at lower nominal GDP growth as well. So that also suggests that it will be even more difficult to achieve some of these revenue targets. Let us not also forget that when it comes to revenues, divestment proceeds could be a bit more difficult to achieve the targets that they have set there. You have also had some dividend payments that have been moved forward to the current fiscal year. So maybe also that could approach some difficult challenges and then the subsidy bill will have to see what happens to international prices to the rupee as well but it could also potentially be a bit challenging on that front in the absence of more decisive measures to curb subsidies but end of the day, this is an Interim Budget, much could potentially be changed when and if a new government comes into place.

Sonia: On the yields itself, the borrowing figure has moved lower for the next year but how much do you see the yields move because 8.75 percent is what it is trading at right now?

Darbha: Talking about the bond yields, we have to keep in mind that they are fundamentally driven by either growth expectations or inflation expectations or both. The budget per se has not done much for growth expectations. In a sense that the policies that were taken at the last minute are too near to call any growth changes. So hence what is going to happen to bond yields would be driven fundamentally in my personal view by the inflation expectations. The inflation expectations can be monitored both from what is happening to the overall fisc as well as what is the monetary policy framework.

So in that context, I think definitely if you see yesterday the market initially the yields went down and subsequently it has become flat. It indicates some sense of a jitteriness by the market on where the yields are going because on one hand they are seeing the total borrowing being less than market expectation hence that would give us or the fiscal targets as your previous question indicated there are always some dark pools in the Budget where you would see some hidden deficits. So the market maybe waiting for the full numbers to evolve through months. Hence they may not be fully trusting the Budget the way it was announced.

In my view, in the current 8.75, over the next few months, given the way the monetary policy stance is going to come along, along with the fiscal stance that is reflected in the Budget would make the market fairly sort of a range bound. It is fairly hard to exactly pinpoint where it would go but my guess is it would be anywhere between 8.6 and 8.9 kind of 10-year bond yields is going to be in that kind of a rangebound numbers that we are expected to see.

Latha: Last year we didn’t see any appetite for that Rs 15,000-16,000 crore that hits the market every Friday. So from almost a second week of April, the appetite had died down. How do you expect it this time? Once again shooting over 9 percent the yields?

Darbha: To an extent it depends upon the stance of the Reserve Bank of India (RBI) as well in terms of what they are going to do with the open market operations (OMOs). If for example the OMOs are going to be used as has been discussed in the Urjit Patel committee, more for mopping liquidity and management liquidity rather than implicitly subsiding the government debt, the pressure on the bond yields is going to be definitely high. But then we need to understand would the RBI take that stand in a scenario where particularly the new government might want to hit the market with some borrowing without raising the interest rates.

So in my view, if everything as it is in a status quo scenario, if the borrowing is going to go up and OMOs are going to be used less frequently, definitely the yields could go beyond 9. However, there could be some lot many clever things that the government and RBI could do in terms of diversifying the base for the government debt for example FIIs you could bring in and retail you can bring in. So if those people come up then potentially we have additional demand for those amount of borrowing that hitherto you may not have found the takers.

Sonia: You yourself have mentioned that these excise duty cuts are pre-election sweeteners, it will make it very difficult for the next government to meet those fiscal deficit target so do you get a sense that it is inevitable that these excise duty cuts will be reversed post June?

Eskesen: I think it could potentially be difficult. When you first taste the candy, you don’t want to leg go of that in some sense. So I think politically it could be somewhat difficult to roll this back and that suggests that other measures will have to be tabled on the spending side potentially on the revenue side. So in some sense these are political sweeteners but it certainly adds to the difficulties next year of meeting that tax revenue targets. So the 4.1 percent for next year if that is going to ultimately be the target, it has to be based on much more realistic revenue projection and also in that context adjustments along the line.