Rising oil prices have been plaguing Indian macros for the past few years. But with international oil prices cooling significantly, it is expected to benefit the Indian economy greatly, says Indranil Sengupta, chief economist, India, at Bank of America Merrill Lynch.
However, he still believes there are risks to 4.1 percent fiscal deficit target for FY15 as tax revenue projections look ambitious. But he does not think the government’s borrowing programme is at risk. He explains that the government has large surplus, to the tune of Rs 70,000 crore, with the Reserve Bank. This will help keep borrowing in check.
Sengupta says gas price hike will help meet fiscal deficit target for FY15.
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He believes that August inflation will continue to be at around 8.5 percent, but post the harvest season and betting on normal monsoon, inflation may cool to 7 percent level by year-end.
He expects rupee to be anchored around 60 per dollar.
Below is the verbatim transcript of Indranil Sengupta's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Is there a reset of the macros simply because crude has been much kinder and looks like a secular downtrend?
A: I think that one of the biggest problems that we have faced in the last five years has been rising oil prices and at Merrill we believe that oil will now stabilise somewhere at current levels all the way till 2020. So that is why we think that growth should rebound to 7.5 percent levels by 2018 because a major drag on the economy is structurally going away because of shale gas production on the one hand and Fed tightening on the other.
Latha: What is the immediate call on the fiscal deficit number itself? Now you believe 4.1 percent is the base case?
A: There are risks to 4.1 percent in the sense that the tax revenue projections are ambitious. There has been this spillover of expenditure from last year. It remains to be seen whether you can complete divestment because of the Fed tapering that is going on. But government had a very large surplus of Rs 70,000-80,000 crore with the Reserve Bank of India (RBI). It is just you are going to utilize Rs 17,000 crore in this Budget so far. So in case you see a fiscal overrun, there will be sufficient cushion available to the finance minister to keep the borrowing programme in check. That is what matters. The fiscal deficit number is only important to the extent that it leads to any borrowing. So I don’t think the borrowing programme is at risk.
Sonia: If other steps are taken like liquefied petroleum gas (LPG), kerosene prices are hiked then how much do you think the oil subsidy could come down to?
A: As of now, the government has said that they do not want to hike LPG prices. So that is fairly hypothetical but clearly, the fiscal deficit would benefit, whether it would do so but their stated position so far is that they do not want that. So if they just keep on increasing the diesel subsidy by 50 paise and oil is where it is, rupee is where it is, we will be marking diesel to global prices. In that case, there is no great need either for the government to change cooking gas prices.
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