Budget 2013: No surge in short-term; Budget key to fiscal target: HSBC

Leif Eskesen, chief economist - India and ASEAN, HSBC explains on CNBC-TV18 that the PMI data for January was mixed and the government may find it difficult to achieve the target of 5.3-percent fiscal deficit set for FY13.

The senior economist emphasises that none of the government’s reforms to contain the CAD or remove supplyside constraints will have any impact in the short-term.
Eskesen hopes to see continued progress in fiscal consolidation and adds that a Budget with effective measures to boost economic growth was key to achieving the fiscal target of 4.8 percent in FY14. Below is the edited transcript of the analysis on CNBC-TV18 Q: The Indian PMI data for the month of January threw up a mixed bag of indicators where manufacturing trended lower and services moved higher. What trends do you spot and how would you extrapolate the data in terms of growth?
A: The data is a bit mixed. The PMI data indicates that growth in the manufacturing sector came off a bit. And there are a few reasons for this. One was that orders fell and failed to grow as rapidly as in December including the lag in the growth of export orders.
Add to this, the increased power outages that effectively constrained production and output. However, I think the slowdown in the growth of the manufacturing sector is somewhat temporary. I do expect a little recovery in growth as manufacturers still rely on a drawdown in inventories to meet demand.
So over the next couple of months it is most likely manufacturers will replenish inventories and that will start to support growth in output. So the process of recovery is going to continue over the next few months.
The service sector PMI indicates a pick-up in growth for the second month in a row and has return to historical averages. The recovery was also led by firming up of order inflows as compared to December. Overall, the pick-up in manufacturing and services PMI on the domestic front was due to the push on reforms over the past few months which also boosted market sentiment.
Stabilisation in the global markets over the few months has also helped support order-flows for the Indian corporate sector both in services and manufacturing. According to our growth forecast, the GDP in the short-term is probably going to relatively move sideways to aid a stabilisation in growth.
Over the next couple of quarters, I estimate a gradual recovery in growth on the back of a sustained reform momentum, but that recovery is going to be relatively protracted. Based on the annual growth rate of 5.2 percent in the current, I estimate the growth rate to go up to 6.2 percent in the next fiscal led by a recovery in the investment cycle. Q: What do you make of the current account deficit (CAD)? In light of the soon-to-be released trade deficit data for January, do you see the CAD considerably receding in the fourth quarter? Given that in the next credit policy the RBI governor will have a clear idea of the likely trade deficit in January and February, do you think he will have any room to cut rates?
A: In the short-term, the CAD is going to remain quite elevated as the external scenario is still somewhat constrained with global economic headwinds constraining export growth. The oil bill will remain relatively high till the initiatives by the government to reduce subsidies starts to take effect. The measures taken to reduce gold imports will also not have any significant impact in the short-term.
The factors that held back growth have taken their toll on the current account leading to the phenomenon of import substitution. So, domestic manufacturers still find it difficult to meet local demand due to constraints on the supply side. Only where there is a little more traction on reforms to revive the supplyside, will manufacturers begin to meet domestic demand and eventually help contain the CAD. But all this will take time.
Since the CAD in the short-term will remain relatively elevated, it is key that the government continues with the reform momentum.
As far as Reserve Bank of India’s (RBI) monetary options is concerned, I would agree with the central bank that the scope for any easing in monetary policy is quite limited. And the limitation in scope is not necessarily due to an elevated CAD, but on the slow traction on fiscal consolidation which is expected to receive a boost with the announcement of the Budget.
But overall scenario will continue to be one of a slowdown in growth in India led by the supplyside constraints. The central bank might cut 25 bps but there is little hope anything significant till there is fiscal consolidation and progress on structural reform is maintained. Q: What do you make of all the reforms announced till now? The government is stepping on the pedal to achieve the divestment target. Do you think the government will be able to bridge the fiscal deficit of 5.3 percent in FY13?
A: Overall, the reform momentum over the past few months has encouraging enough to raise expectation of a gradual recovery in growth. However, the fiscal deficit target of 5.3 percent for the current fiscal maybe difficult to achieve. It is quite clear that the government is taking all effort to contain spending in the last few months of the fiscal to bring the deficit closer to the target. But the 5.3-percent target may still be beyond its grasp.
The 4.8-percent target for the next fiscal might be achieved, but it will be important to ensure that the Budget effectively builds on credible assumptions about the growth outlook, the prospects for divestment proceeds and increased efforts to continue with the process of reduction of the subsidy, address generation of revenues by broadening the base on indirect taxes and ultimately placing constraints on spending.
So I think the overall progress on fiscal consolidation will continue even if the fiscal target may not be achieved.