MC Interview | Finmin evaluating impact of scanty rain in August on rural economy: CEA

V Anantha Nageswaran, India’s chief economic advisor (CEA)

The finance ministry has started assessing the impact of relatively deficient rainfall received in August to analyse the impact on the rural economy, India’s chief economic advisor (CEA) V Anantha Nageswaran told Moneycontrol in an interview. Through the review, the government is trying to track whether growth is even, and gauge the pick-up in rural consumption and how it may evolve in fiscal terms as it relates with the demand for work under MGNREGA.

Nageswaran spoke to Moneycontrol on this and a wide array of other topics. Edited excerpts.

Q: Are there any concerns for the economy around the monsoon?

We are assessing the implication of relatively deficient monsoon rainfall we had in August. We have to wait and see if the IMD (India Meteorological Department) projection for September pans out as normal, then we will be able to take stock of how it pans out in fiscal terms.

We are trying to keep an eye on different dimensions of growth that India is going through. How even or uneven, and if rural consumption is picking up or not.

For FMCG (fast-moving consumer goods) in Q4FY23 there was a small positive, which has expanded in Q1FY24. Rural consumption of FMCG has recorded pretty decent growth in Q1 of FY24. But how it performs during the rest of the year is something that we need to look at as we have just finished August. And in August there were concerns because of the monsoon.

Q: How do you view the growth in rural economy and demand for the job scheme under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) as only Rs 60,000 crore has been budgeted this year?

Rural growth has been improving. But we have to wait and see what impact the monsoon has on rural growth and sentiment on both farm and non-farm aspects of the rural economy. MGNREGA demand trends have been lower than the previous year, it has not gone up. If there is MNREGA demand, it will be met.

Q: Are there any concerns on tax and non-tax revenue this year as the disinvestment target is unlikely to be met? Corporate tax collection too has been lower this year.

So far, revenue collection is on track. Corporate tax is advance tax payments. The numbers will be high in the festive season. We should not be investing too much time in analysing quarter-to-quarter fluctuations.

Our disinvestment projections are not on the high side. The dividend inflows from CPSEs (central public sector enterprises) have been better than budgeted, so some of it provides a compensation to the disinvestment shortfall.

Then we have the nominal GDP growth assumption, revenue buoyancy assumption, which are all on conservative side. There are some intrinsic buffers.

Q: Is private sector capex picking up? In view of risks due to a deficient monsoon, will you still stick to the 6.5 percent GDP growth estimate as Q1FY24 nominal GDP is at only 8 percent?

Q1 nominal GDP is a year-on-year phenomenon because last year Q1 was a very high base. It's a phenomenon for quarter-to-quarter comparison. Overall assumption of 10.5 nominal GDP growth in FY24… we are fine with it. We are happy with the Q1 GDP growth number. We maintain 6.5 percent GDP growth in FY24.

GDP risks are evenly balanced. Because in August there were concerns because of the monsoon. We have to quantify—based on the share of rainfall, reservoir content—its impact on agriculture and how much it will translate into GDP. We will have to watch for and estimate the impact. At the same time, private sector capital formation is now becoming an emerging reality, which is a positive development. So I maintain 6.5 percent as my baseline GDP growth. Risks are symmetric on both sides.

The current GDP growth projections have taken into consideration the fact that monetary policy interest rates have gone up. It has been accounted for that interest rates have gone up by 200-250 bps (basis points). I would not consider these rates as overly growth-restrictive.

Q: Many have upgraded India's 2023-24 growth forecast. Moody’s has upgraded the GDP estimate for 2023, though it brought it down for 2024.

India has put behind Covid-related economic disruptions and is on track to grow at a steady pace, because balance sheet issues in the banking sector are addressed. The government has led infrastructure investments in the last several years, and the private sector is poised to take over. We have to get over the quarterly fluctuations and look at the bigger picture.

Q: Is there any plan to bring down India's high debt to GDP ratio that went up during the pandemic?

International agencies project these numbers based on how they see the growth, etc. In general, the debt ratio went up during the pandemic years, nominal GDP also contracted. Spending had to be undertaken. Between 2005 and 2021 India’s debt to GDP ratio at the general government level, both the Union and the states, barely budged from 81 percent to 84 percent. India was one of the few countries where the debt ratio barely moved in the last 16 years in spite of global uncertainties, financial crisis, etc. India, Indonesia and Germany were among the few countries that had debt ratio increases of 3 percent or less. Once nominal GDP growth returns on an average to 11-12 percent of GDP which we are looking at in next 7-10 years, then automatically the debt ratio will come down because our cost of capital (government borrowing cost) is well within the GDP growth rate. Over the years, if we also utilise specific asset monetisation and privatisation proceeds to support high cost in debt, etc, then also the debt profile will improve.

Q: Can firming oil prices be a risk to India’s fiscal math?

At the moment oil prices are within the range that we are comfortable with. The RBI (Reserve Bank of India) did take this into consideration in the first week of August when it upgraded its inflation numbers. Oil prices are factored in the projection that the RBI has made for inflation.

Q: July CPI (Consumer Price Index) inflation shot up to 7.44 percent. By when do you see it stabilising?

Some of the commodities that contributed to the July spike have already begun to recede. The RBI in its inflation projection factored it in. We do expect it to taper and come back well within the range. WPI (Wholesale Price Index) will become positive once the base effect wears off.

Q: Can there be any spillover risks from developed economies going ahead?

We have flagged that we have to keep an eye on the impact of energy prices. We are not transferring it into retail prices. But if we don't transfer to retail prices then it has implications for the oil marketing companies. Ultimately, we need to keep an eye for inflation.

Globally, tighter financial conditions have not materialised despite higher interest rates because capital markets have proven resilient in the developed world. Capital markets in the developed world need to correct, it will have a spillover effect on emerging economies’ stock markets. Given the wider retail participation in India in the last several years, that is something we need to see, what kind of wealth effect it will have. But it may not necessarily happen in the current fiscal, it can be in the next fiscal.

We are looking at medium-term energy security and affordable energy which is important for India in the light of ongoing payment related discourse.

Q: Government capex is mostly focussed on the construction sector. Is private capex growth too restricted to a few sectors?

Capex predominantly comes from a few industries. That is why railways, roads, petroleum refineries are all part of the government's capex plan. Proceeding on this, various ministries submitted proposals which aggregated to Rs 10 lakh crore budget outlay. It is not distorted by one sector or the other.

Private capex is seen in at least 20 out of the major 24 sectors, it is not concentrated in a few sectors, it's broad-based.

Q: Are we moving towards any conclusive discussions in G20 on the reforms in the multilateral development banks (MDBs)?

The first part of the report of the expert group on MDB reforms is out. The next part will be out in October. Developed countries want MDBs to also consider global challenges. Many other countries say even food, energy, water issues transcend boundaries. These are global challenges. There are developmental challenges that they used to finance earlier, like education, water and other development-related funding. The issue is to find the resources for the banks to be able to finance both the standard poverty alleviation and sustainable related goals and existing and emerging global challenges from the pandemic, war, etc. The first step was the committee appointed under the Indonesian presidency addressing the capital adequacy framework. The question is, what else can we do with existing capital? The second is to streamline internal procedures, processes and incentive systems. The next step is capital increase for the IDA (International Development Association), the IBRD (International Bank for Reconstruction and Development) —all these issues are on the table. That is what NK Singh and co-convenors came out with in the first part.

The second part will focus on attracting other sources of funding. India has carried forward the discussion trying to get consensus on the steps required. It is ongoing. We have moved it forward a bit.

Q: Are there any contentious issues in the G20 leaders’ summit?

Only political issues are contentious, the rest we have managed to find a consensus to move the agenda forward on debt issues, crypto regulation and taxation, infrastructure… It's usually the political part that becomes the subject of the intensive discussion.

Q: Is there a pipeline of green bonds being put forth by ministries?

It is based on projects submitted by different ministries. Funds are allotted for the most relevant and matching projects that match the green bond framework criteria. Only a few ministries have projects relevant under the green bond framework including environment, forest and renewable energy.

Q: Do you think it is time to revisit the Insolvency and Bankruptcy Code (IBC)?

The IBC has settled down. It is delivering what it is supposed to deliver. Many corporate resolutions get resolved before coming to IBC, because the very existence of the IBC persuades lenders and borrowers to resolve certain issues. The IBC has had an impact not only in terms of recovery and restructuring but also in creating a cultural shift. Despite two years of Covid-related disruptions, it has served its purpose. Improvements and amendments are part of the process.

Q: As energy still remains out of goods and services tax (GST) purview, what are some of the big reforms that the regime needs?

It was already agreed to in the original inception of GST that energy will be subsumed. The timing was left to the GST Council to decide. The intent of GST was to have energy products in the GST basket. A system after a particular passage of time needs review, like if zero-rated items need to be increased, simplifying the number of slabs, process improvements… These are questions that the council is grappling with on an ongoing basis. If a very important segment (energy) of overall goods in the country is outside the GST framework, then input tax credit will be incomplete. There is always a case for making sure that GST covers as many goods and services as possible so that the efficiency aspect of GST as a tax is there.