Macro Economic Survey 2016: 7-7.5% GDP growth target 'credible and realistic', says HSBC

What the larger message here is, growth of 7-7.5 percent means it is a slowdown next year compared to this year which is very realistic. India got massive terms of trade shock last year that will roll off this year.

Latha: How would you read these statements, credibility and optimality requires sticking to 3.5 percent and then my next question, if they indeed stuck to 3.5 percent, unscheduled rate cut possible?

Chinoy: So far what you have read, full marks to the economic survey. They have been realistic and I think the 3.5 percent will be music to the bond markets. The bond markets had a very rough couple of months, I think this will be a positive surprise because market had basically priced in some slippage, so, there will be a surprise here.

I think the question is going to be how this gets done? We would hope that 3.5 percent is accompanied with realistic assumptions on the tax side and some part of the pay commission is pushed out which is what happened in the Railway Budget. Our sense on the Railway Budget was you could have some special allowances that were pushed out which ties in with Pranjul’s point.

So to the extent that some of these wages are pushed out, you reach a number of 3.5 percent, very positive but I think what you may get with that from your earlier statement is that they will rethink the fiscal roadmap going forward. So what the government may do is, stick to 3.5 percent for next year but then say that we may take a couple of years to go to 3 percent and that is the balance you will strike between growth and fiscal consolidation.

In terms of monetary policy, we do expect a rate cut in April. It is possible that that could happen before. The inflation numbers in the last two months have been a little on the upside, core has been coming down, food is surprised to the upside but yes I would be agnostic about timing. I think it could come either in the April review or it could come shortly after the Budget. However, the fact that you stick to 3.5 percent and then you get a rate cut is exactly the right policy mix that the investors will be looking for.

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Latha: What are your thoughts on the growth assumptions, the inflation assumptions of 4.5-5 percent as well what will that mean in terms of fiscal deficit for next year?

Bhandari: I think it is a very fantastic growth number, very realistic, very credible, something between 7 percent and 7.5 percent. We ourselves are at 7.4, flattish growth compared to last year, so we are happy to see this number here.

Inflation of 4.5-5 looks quite low to us. Even they meet the 5 percent target by March 2017, the average could be much higher. I think it could be somewhere in the 5.5 percent range.

Speculating a bit, reading between the lines, it could mean that the government is probably not going to have the HRA allowances this year, maybe they will defer it to next year. I think politically that could also be accepted because even in the Sixth Pay Commission, they have not implemented immediately in fact allowances had got implemented around 2008-2009. So 10 years haven’t yet lapsed, they might get away with that. That is just reading between the lines.

Good to hear that they want to revisit the fiscal consolidation path needed because year-after-year we sign up for something very difficult for next year and then we struggle when the next year comes. I think here the government will have to be very creative, looking at the central fiscal deficit and the state fiscal deficit together especially in years like now when the states have so much obligations like UDAY, interest rates payment, its own Seventh Pay Commission, we should be targeting some sort of a consolidated fiscal deficit and the centre should compromise sometime when the state is in trouble. So, I feel there is parts of all of this here, some of this is relevant in the Budget but some of this will be debated over the next several months.

Latha: Do you think ambitions of a pump-priming Budget should be toned down or thrown out?

Bhandari: Perhaps yes and there is only so much that the Budget could have delivered. It is giving you a little bit of Seventh Pay Commission money, it will give you a little bit for rural growth, infrastructure, it is going to give you some money on bank recapitalisation, a little bit on each of it and then by keeping fiscal deficit at 3.5, if it can help bring down long bond yields then it creates a scenario in which you crown in the private sector overtime and that private sector participation -- better prospects of private sector participation by keeping deficit at 3.5 is something which is good for growth in the medium-term and when I say medium-term, I don’t say two-three years, I mean something as soon as the second half of the upcoming fiscal year.

Latha: Your first thoughts on this. Tax revenues are expected to be higher in FY16 and all the other statements we have read.

Chakraborty: FY16, we have got a huge bounty from the lower oil prices. Our estimate is that a USD 10 dollar decline in oil prices is about 0.4 percent of gross domestic product (GDP), additional benefit to the fiscal, if nothing is passed on to the consumers. So, overall, we think in FY16, we have got about 0.6-0.8 percent of GDP additional savings from oil. And, in fact, what is going to happen in FY17 is for the first time in almost 10 years, indirect taxes are going to be higher than direct taxes because of oil revenues. So, I am not surprised that the government is sounding a bit more optimistic on the tax side for FY16. The challenges are quite well known. We are in a slowing economy, so direct tax pushing will be difficult. And the Pay Commission implementation, the Railway Budget seems to have accounted for the full Pay Commission implementation so, it will be slightly odd if the Union Budget does not do it. So, it remains to be seen on how they approach this matter.

Ekta: When you talk about the rupee, we are already close to all-time lows. What is your sense in terms of how the rupee could possibly move in FY17 and it might just be a blessing in disguise because it could possibly give some impetus to exports which have now been declining for 14 consecutive months.

Chakraborty: The rupee has been one of the worst performers in 2016, but still if you look at the January data, on a valuation terms, it has not what is in March. So, in essence, the nominal depreciation needs to be much more than what it has happened for the arrear numbers to correct from the 113.5 kind of numbers that we are seeing right now. Now, the other issue is that the January-March quarter seems to be significantly balance of payments (BOP) positive. We are looking at a current account surplus. Still we are seeing this currency weakness means that the psychology of the markets have changed substantially. In the last few days we have seen some amount of bond outflows also. So, whether this trend continues or not, that will be another key driver. But, my sense is that still some 69-70 per dollar kind of range will be protected and we are not really looking at a significant depreciation beyond that._PAGEBREAK_

Latha: 7-7.5 percent gross domestic product (GDP) growth is that a realistic forecast or is this starting downbeat? Virmani: As I have not seen the number but you recall that in the mid-year review for the current year they had said 7 to 7.5 percent and as you noted that is a 1 whole percent point down from the previous economic survey when they had made forecast. I think the second point which is important is that even if the forecast for next year in 7.50 to 8 you have to remember the exact number which National Statistical Office (NSO) gave out for this year’s nominal GDP growth is 8.5 percent not the level of 12, so that is very important to keep in mind.

If I was projecting forward for the nominal, the difference here again if you recall NSO gave a number of 7.6 for the current year, so that means an inflation of about 1 to 1.50 percent. So, at maximum I would say if we projected forward, even if there is a revival of GDP deflator inflation I wouldn’t expect more than 3 percent, so 1 to 3 percent, so even if you add 3 percent to 8 percent that just gives you 11 percent.

If you recall the last survey they took out only the good points from the global situation. So, now I feel that they are over compensating and probably the economic survey will emphasis all the negative parts of the impact of the global economy India. That I would say is my main observation that perhaps because they raised expectations too high in the last economic survey you remember the sweet spot and all that sort of thing I think they neglected the negative effects. They are kind of going a little bit in the opposite direction now.

Latha: Would you work with 3.5 percent, that is the prudent and the inevitable cost to take?

Virmani: As I have been saying for some time I see a fiscal and monetary policy as a mix for each country and for India I have been saying for some time that we need a looser monetary policy and sticking to the fiscal policy targets. I said that even after the previous Budget where I would think 99 percent of the economist supported that going over the target. However, I think the problem has been that Reserve Bank of India (RBI) in my view which is contrary to most market participants is that policy has tighten over the last six to nine months effectively.

Latha: If this comes in at 3.50 percent, it sets the stage for an unscheduled monetary policy cut?

Virmani: That is what happened last time so if you go by the pattern that obviously would be a possibility.

Reema: On this point about time to review the medium-term fiscal framework, does that imply that the 3 percent medium-term target that we put out by hitting it in FY19, gets postponed even further and how will that be read. Will it be read negatively by the sovereign ratings because I was reading one article which said that the key reason for the big sell off that we saw in the debt market by foreign portfolio investors (FPI) is on account of worries that we are likely to overshoot our fiscal deficit target and we are anyway at the lowest grade of investment ratings. So, if the credit rating agencies do not read it positively, we see a downgrade, then the Indian markets are now open for more. So, how will this postponement of this 3 percent fiscal deficit target be seen?

Sanyal: There are two three different questions in this. First of all, our sense is that they will, as some of the sound bytes also suggest, that they will broadly adhere to the fiscal deficit target in this particular Budget. That should provide some kind of relief to rating agencies as well as to foreign investors which had been a concern off late. And, overall they would do better if they broadly stick to their fiscal deficit target for the subsequent years also because if you see, over the last few years, there had been changes in this particular Fiscal Responsibility and Budget Management (FRBM) targets and as late as in February, 2015, they have made a major revision. If they bring in such revisions so frequently to a medium-term path, the credibility goes down significantly. So, I would expect they broadly stick to the 3 percent target for the next financial year as well.

Ekta: While we are working with the estimate that maybe 3.5 percent is what they would go with for FY17, what would you prefer as an economist, 3.5 percent with partial implementation of the Seventh Pay Commission or 3.7 percent with a full implementation of Seventh Pay Commission on the caveat that you do not know what oil prices will possibly be at or rather global commodity prices would be at in the year 2018 or 2019.

Sanyal: In this case, 3.5 percent or a number very close to that makes more sense to me. Just see it this way. A debate between 3.5 and 3.8 percent sounds somewhat relevant. But, if you think in terms of the actual quantum of additional spending, the difference between 3.5 and 3.8 is just about Rs 400 billion or Rs 40,000 crore. Now, over and above, a total Budget of Rs 19 lakh crore or Rs 19 trillion is just around 2 percentage points of additional spending. So, you are saying to boost the economy instead of spending Rs 100, I am spending Rs 102. It does not really make so much of a difference. But, you lose the fiscal credibility, your long-term fiscal credibility on which you are scoring good points now.

Actually, if you deliver 3.5 or stay very close to 3.5 percent, it actually offers more room for easing on the monetary policy side as some of my other colleagues have been highlighting and we do think that there is room for, with this fiscal consolidation and general softening in commodity prices globally, we see room for two more rate cuts. One in April, one possibly, in June itself. I do not really factor in anything inter-meeting at this juncture, but by mid of 2016, policy rates can be 50 basis points lower.