Govt may raise income tax exemption limit in Budget: CLSA

Besides, CLSA has also cut its GDP growth forecast for FY17 by 1.2 percentage points to 6.5 percent, he said, adding that the current disruption is unlikely to affect the outlook for FY18.Below is the verbatim transcript of Rajeev Malik's interview to Prashant Nair and Reema Tendulkar on CNBC-TV18.Prashant: Let us just start with the very immediate which is demonetisation, cash exchange. Just enough time has passed and we are also coming close to the deadline that is the end of December for exchange  of notes. What is your assessment of the impact on business momentum and business activity on the ground?A: The near term impact was always going to be negative. Don’t forget the most relevant reason for that is the liquidity squeeze, the cash squeeze and that is just going to play out as far as the real economic impact is concerned. Our sense is, December will be the month which will capture the most severe impact in terms of hit to output. Part of November would have been adjusted by just businesses running down inventories. So, the production impact will actually be more pronounced in December and thereafter more or less in sync with as the cash squeeze gradually dissipates through the end of the first quarter activity sequentially will improve slightly. So, overall, roughly a two quarter impact that is being modeled in, in a very imprecise manner I should emphasize, given the fact that there is very little really to hang our hats on. Reema: What could the gross domestic product (GDP) growth look like in Q3 and Q4 of this financial year and therefore how does it bring down your full year estimates and no change to FY18?A: Our way of thinking about it is like I mentioned two quarter impact, we have shaved off roughly 2 percentage point of growth that we were expecting prior to the currency swap and that takes down the full year number by about a percentage point. So, we had 7.6 percent earlier, we are now looking at 6.5 percent. Do bear in mind that this exercise has never been done anywhere before. There is hardly any sensitivity. We are very much in unchartered territory and the very fact that policymakers, both in terms of the government and Reserve Bank of India (RBI) have been able to offer exceptionally little clarity in terms of hit, just puts us all much more in the dark. However, broadly speaking, two quarter hit which will set the stage in a way for second half of FY18 to at least optically look better. Prashant: What is the impact of this on the Budget I think is what everybody wants to know. However, I want to ask you, what is the political implication of demonetisation according to you? You write in your report that this is most likely going to benefit Modi? A: I think so. I think at the end of the day for all the visuals and comments and playing up of commentary from the opposition sides about all the distress, anxiety and inconveniences, many of them which are legitimate, I think at the end of the day it is an area which is being touched in a very bold manner which many governments have not done before. Now, I think it is a classic case of a very well sought after goal being approached with a questionable tool with exceptionally poor implementation. So, I think lot of the debate gets clouded by what is the goal and how are we going to achieve it. I think the first is very welcome and that is where a lot of political legitimacy is going to be gained. However, the implementation has been bad which to some extent I think the Budget will begin to address in terms of a feel good approach. Now, one big question mark is going to be really to what extent do government revenues, directly and indirectly, benefit for FY18 and whatever we might say, pre this exercise, the actual impact on revenue would still be positive. So, whether it is in the aggregate terms, slightly under a percentage point of GDP, it certainly will give the government more leeway to spend it and part of generation of that feel good factor would have to be in terms of raising the exemption limit as far as personal income tax is concerned for example. Prashant: Journalists across, sort of an exercise that they do before elections, they put out their own forecasts in terms of who is going to do how, whether state elections or central elections, I am going to ask you to put out your forecast. You are a very keen political watcher as well. UP, Punjab, who do you think -- if you were a betting man, who would come out ahead? A: Anybody’s guess quite frankly at this point. There are wins that are tilting in one direction but simply because of the number of players involved and depending on how pre and post collations, etc necessarily get formed up, so, there is fair amount of stuff up in the air that remains to be seen. However, what is more important is quite frankly I think everyone plays up. The impact of state elections, I would be somewhat more restrained. Yes, politically UP will matter a lot, how much of it is going to change in terms of policymaking is a separate issue. Go back to Bihar, how much of a change did it necessarily trigger. So, I think the calculations, etc can change.Prashant: Where I am coming from is it will matter a lot more this time because people have already started talking about 2019, it is still away, and UP and Punjab essentially will to a lot of people show whether this has strengthened Modi and BJPs sort of hand in cards.A: I don’t know. I think people love to talk about the long term partly because it doesn’t cost anything. I have heard about what in 30 years India and Indian economy is going to be like. It is great anecdote and talking about concepts. The point I am trying to emphasise is we will extract far too many signals from state elections to lead into national elections and the two tend to follow slightly different dynamics; that is all. I am not saying that it is totally irrelevant, it is important, I would just be restrained in terms of how much a signal one extracts from that.Prashant: When you say Budget for FY18 will be a feel good Budget, can explain what exactly do you mean?A: Tactically, one of the big benefits from public finances really is going to be to the extent that you have part of the informal unaccounted economy coming into the formal network and to what extent it will end up boosting on the revenue side. Do not forget, on the halfway point of Modi’s first term, it is really a case of how much of firepower is there in terms of pumping up on the fiscal front, we know from a private Capex standpoint, not much is happening. Public Capex, yes, has been doing well as much as potentially they could. Private consumption, which is what was holding up growth at least for a couple of quarters will have a set back because of this currency exchange playing out.So the question really is, even if it is an experiment whose implementation has gone horribly bad, how do you reverse that fee bad optics to a feel good optics and that is where to the extent that the government gets a bit of a revenue boost that can be distributed. I would think of the Budget exercise very much from a redistribution perspective. I do not think there is going to be a whole lot of new initiatives per se. There will be very much a focus in terms of improving whatever currently has already been announced, but most important is going to be in terms of generating a feel good factor which clearly has to come from some good he has given to either individuals from a higher exemption limit to the pro-poor, pro-rural areas. There is already talk about some kind of a sector specific farm loan waiver. I do not think it is going to be anywhere in size compared to what we saw during the UPA. But all of these, when you put together, tell you about how the political optics themselves are shifting away from the whole energy that we saw until very recently in terms of trying to boost growth.Reema: The other big dislocation in the global markets was caused by Trump’s unexpected victory as the 45th president of the United States. How does it alter your expectations of where the dollar is headed from here, what happens to the rupee on global bond yields as well as the picture on India?A: 2017 is going to be dominated by what a stronger dollar lands up doing to emerging markets overall. And India which clearly has been one important beneficiary of this combination of weak global growth and exceptionally easy global liquidity will have to adjust to changing dynamics in both. So, our sense remains the combination of stronger dollar, higher US rates, higher US bond yields, etc will extract a price for all EM currencies and the rupee is not going to be any different. There is no doubt that India and the rupee and underpinnings are far better than what they were during the 2013 taper tantrums. But that does not mean that adjustment is not going to take place and exchange rate is a relative price. And the fact that the dollar is going to be stronger and the US yields would be heading higher will have an impact and do not forget, India has been an important beneficiary of just the high yields that local currency government bonds have generally offered. So, we will see a bit of a payback on that front, coming through. The net result, while I do think there will be a bit more modest easing from the RBI including one in February, the bigger impact is going to be on further rupee depreciation. So, my sense is by end of 2017, 73-74 per dollar is not really an outlandish number.