FY22 fiscal gap target can be met: Anubhuti Sahay | Economic Times

At a time when the possibility of a third wave of the Covid-19 pandemic has evoked fresh concerns about economic growth and government revenue streams, Standard Chartered Bank's Anubhuti Sahay believes that the Centre can meet its fiscal deficit target for the current financial year. A key variable will be the success of the government's ambitious disinvestment plan for the current financial year."Our baseline view is that the government still can meet 6.8% of fiscal deficit target for FY22 as budgeted because they did a very conservative budgeting of revenues and cleaned up past dues," Sahay, the Head of Economic Research, South Asia, Standard Chartered Bank, said in an interview to ETMarkets.com.Edited excerpts: Inflation for the last couple of months has been well above the central bank’s target. But given the fact that growth is so fragile, what do you think the RBI should do at this juncture?Inflation has proven more persistent than expected and is thus a matter of concern. Having said that, if we look at inflation, our estimate is that almost 50% of the increase in average inflation between FY21 and FY20 was driven by higher taxes on fuel & liquor, higher palm oil prices and to some extent global crude oil prices. That underlines that inflation is not demand driven. More importantly at this particular juncture, the focus clearly has to be on growth because while India is recording a lower number of cases today, looking at the global experience, yet another round of increase in infection cannot be ruled out. Full vaccination or reaching herd immunity can take time. We are of the view that the Reserve Bank of India and the Monetary Policy Committee has to remain clearly focused on growth for now. Policy normalisation in our view will only happen once RBI/ MPC has hard data on high level of vaccination coverage. That is the time when they can think about policy normalisation. Liquidity in the banking system is supposed to grow even further because in this quarter we have a lot of T-bill redemptions and core liquidity is more than Rs 10 lakh crore. In terms of asset price inflation, do you think it is time that the RBI should start signalling that at a certain point of time it will start taking out this kind of surplus?A couple of points here. First of all, is excess liquidity in the banking system leading to inflation or rather, is inflation a monetary phenomenon in India? Our view is No. We say so because the traditional channel via which inflation becomes a monetary phenomenon viz. the credit channel is not functioning smoothly currently. Is it seeding into higher financial asset prices and leading to some bit of asset inflation? Possibly yes. But higher financial asset prices are also a reflection of lack of alternative sources to invest in. The whole intent of excess liquidity in the banking system is to ensure that monetary policy transmission happens and market sentiment remains supported. We do expect the overall stock of liquidity to be reduced possibly from the December policy meeting. In the near term to reduce the excess in the banking system, few measures can be announced. However, communication has to be clear that it's more to keep excesses under control rather than a move toward policy normalisation. Do you think that RBI is possibly forced to be more accommodative of certain risks on the horizon? The Fed is talking about tightening, oil prices may have cooled down recently but they have risen very sharply year on year.Given this current backdrop, the priority has to be towards supporting growth. We would not interpret any action from the RBI despite high inflation as turning a blind eye as a lot of inflation is driven by supply chain bottlenecks, rise in global commodity price and pent-up demand being released as more and more economies open. Our view is that oil prices will start trading in the mid 60s by the end of 2021. That should take off some pressure. As of now, we do not agree that RBI is turning a blind eye. They are probably looking at a more opportune time to reorder their priorities which in our view will emerge once they have hard data on decent levels of vaccination coverage. However, six months ahead, if growth picks up very strongly amid high vaccination coverage and timely normalisation of monetary policy is not done, excess liquidity can push inflation higher. What is your view on the fiscal position? In the Budget, the tax projections were quite conservative and so far the GST run rate is not looking bad. In terms of revenues, what sort of situation do you think the government will find itself in by the next Budget?Our baseline view is that the government can still meet 6.8% of fiscal deficit target for FY22 as budgeted because they did a very conservative budgeting of revenues and cleaned up past dues. They have not reduced excise duty which gives them an opportunity to collect more revenues. There is a strain on expenditure because of higher food subsidy, higher fertiliser subsidy and also some other support schemes which they have announced but that can be managed. We are most watchful of the success in the divestment programme. Since the divestment target is Rs 1.75 lakh crore, a shortfall there can leave a large gap in the fiscal deficit. If you were the finance minister and if you had to revive growth at this point of time, then what would your prescription be?The current finance minister has done a good job in terms of laying out a loose fiscal policy over the next five years, which on an average is almost 180 bps higher vis-à-vis the last five years. More importantly, most of the allocation increase is likely to be geared towards capital expenditure. Clearing up the past dues was commendable too. Thus I would not add any further allocation but probably the government can stay focussed on ensuring that the implementation mechanism works smoothly to get the maximum multiplier effect from looser fiscal policy. More measures, to boost confidence further in foreign investors investing more in India expansion of PLI scheme etc can help too. Also providing more confidence to the global & domestic investors in terms of policy consistency and transparency will be key in reviving private investment. Do you think India has a problem with its debt to GDP ratio because right now, it is about 80%, 90%. The growth picture is quite fragile. Could there be a problem with rating agencies at a certain point of time and in terms of the way markets express themselves?Scenarios where debt to GDP becomes a problem can always emerge, especially if nominal GDP growth is not close to double digits. However, as of now, our baseline view is that general government debt to GDP is close to 88% to 90% but is unlikely to become a concern for rating agencies because we expect a gradual downward trend after two to three years. Secondly, there are external buffers like strong FX reserves and reform buffers. Last time India upgraded to investment grade was 2007-2008. Over the last 10 years, a lot of reforms have happened, which were not effectively reflected in the rating. FX reserve cover is in high double digits. These in our view provide a buffer. At present, our real interest rates are extremely low. In terms of FPI investment in the sovereign debt market what would be the view? How would they approach Indian markets?The view would depend on the asset class of investment. On the debt market probably, they have relatively better opportunities to go and invest vis-à-vis India; say in other Asian economies where inflation is low and the fiscal deficit is not as wide. In terms of equity investments, a lot would depend on what the medium-term view is. That remains extremely constructive both from FPI as well as the domestic investors but there can be a bit of caution at this particular juncture given where the valuations are. Where would you see the rupee over a six-month horizon?We have our December 2021 forecast at 75.50 per dollar for the rupee and we see risk of it being weaker than what we are forecasting, reason being that as the economy reopens on a more sustained footing, we would see the current account deficit widening. Also, India in general is likely to be a relatively higher inflation economy. We have wider twin deficits. Thus these factors are likely to weigh on the rupee. We see any episodes of strength in Indian rupee as temporary because fundamentally, the rupee is expected to remain on a weakening bias. RBI intervention also leaves any episodes of strength as temporary Lastly, if you were the RBI governor at this juncture, how would you approach the tricky growth-inflation mix? I would suggest the following to the RBI Governor. If the stock of liquidity becomes too large, it can become very difficult to absorb later on. Thus it is important that timely action is taken to ensure that liquidity remains in surplus, allows monetary policy transmission but unnecessary excesses are mopped off. It is important that measures are announced on a regular frequency while clarifying that these are not measures towards policy normalisation.