You are using an older browser version. Please use a supported version for the best MSN experience.

Now that fiscal policy has come to forefront, central banks need to step back a little: Sajjid Z Chinoy

The Indian Express logo The Indian Express 07-03-2021 P Vaidyanathan Iyer
a person wearing glasses and smiling at the camera © Provided by The Indian Express

On how the Indian economy is placed as the IMF revises global projections upwards

The second half of 2020 helped by a lot of policy stimulus and developed markets helped by very accommodative central banks around the world were much stronger than the IMF had forecast... But I think we have to scratch a little bit below the surface, and what you will find is that despite the good news, which is predominantly in the US and in China, this is still a very incomplete recovery globally. What you see is yes, the US and China will have complete recoveries, but the global economy despite this improved outlook is still going to be about 4 percentage points below the pre-pandemic path, which is great.

From India's perspective, what matters is some of the tensions that will be created by divergences. We are seeing a lot of divergences — globally, geographically, sectorally, inter-temporally, across factors of production. Very strong growth in the US and China, much less so in other parts of the world. A very strong growth in the goods sector, much less so in the services sector. Very strong growth for profits, much less so for labour and for wages. Normally when you have strong US growth, you tend to have big spillover effects to the rest of the world, and when you get a synchronised global recovery, the dollar tends to weaken and that is good for emerging markets because capital flows come into emerging markets. If you, however, get US exceptionalism… the spillover of that to the rest of the world could be lower. That means you get the US growing much more strongly than the rest of the world. And if that happens, you can get a stronger dollar. Now if you get a stronger dollar, you get stronger oil prices like we are seeing right now. Let's hope that is not the base case; normally the dollar and oil tend to move in opposite directions, but you could have this same situation.. We need to be mindful of those kinds of tensions despite the fact that the global economy is doing much better than we thought six months ago.

Replay Video

On whether the Budget projections are realistic

This is one Budget where I think the numbers are actually quite conservative, and I'll tell you why. Normally we have a situation where we are always worried where the Budget targets can be hit, and worried about slippage. But let's start with FY21 and what the Budget presumes. Even for the RE (revised estimates) targets to be met this year — that taxes net of excise — the RE targets are so conservative for this year that the rest of taxes have to contract by 20% in the January-February-March quarter to meet those targets. These taxes grew 25% in the last quarter. So my sense is that you could actually get an upside surprise this year in the FY21 RE number.

Now that's important because if the base for taxes is higher this year, then the asking rate that's required for next year’s tax number is going to be lower. So again, if you take excise out of the picture, the tax buoyancy that is assumed to get to next year's number, it's actually 0.8, it is less than 1. So one of the paradigm changes is that you are seeing a lot of conservatism, welcome conservatism on the revenue side. So I think the tax buoyancy is not very ambitious. I actually think we could be surprised by the upside in terms of GDP growth as well, not because I want to make any heroic assumptions but if you just look at the quarterly trajectory of growth, then you get, if you even presume a 4-4.5% quarter-on-quarter annualised momentum, then the full-year number for 21-22 could be as high as 13% or 13.5% real GDP. To put a deflator of 3-3.5%, you may end up with a nominal GDP of 16% or 17%. This doesn't mean India is booming, this would still be an incomplete recovery. Even if it contracts 6.5% this year and we grow 13% next year, India will still be 4-5 percentage points below its pre-pandemic path…

On the projected fiscal deficit of 9.5%

In recent years, we are always worried that the RE might slip because the last quarter’s revenues don't matter. We actually think that upside surprise to revenue could be as high as half a percent of GDP. So in May, when the CGA numbers come out, it is possible that deficit this year is closer to 9, not 9.5. One of the reasons it was different from the 7% that most analysts predicted was about 1.7% of GDP in terms of food subsidies, which most people had forecast would be on FCI's balance sheet, came back on. So once you adjust for the conservatism and revenues and the food subsidy, you come back quite close to 7%.

If we end up with 9 and a lot of that is because of a one-off payment of FCI arrears or fertiliser arrears, what you see is that subsidy itself has come down by 1.6% of GDP because there are many one-offs this year. So that directly means that this year's deficit, net of those, looks closer to 7.4. So if you we're really going from 7.4 to 6.8, I think that we need to welcome the fact that there has been realism and conservatism on the deficit path and on the revenue.

On the choice between a capital expenditure-driven approach and a cash support approach

One is more relief, one is more kind of stimulus. Ideally, you want a mix of both. I think capital expenditure, though, is important, given India's growth dynamics in the last three years and given the global economy. And really, if you want to get into a virtual cycle, it will have to be investment-led growth. In this environment, you will need some kind of engine, public investment push to crowd in the private sector. So I think that is necessary and inevitable if you are looking at a growth trajectory over the next three years… I think this is equally true of the states. We focus so much on the Centre; the bulk of CapEx happens in states. So it's important that states have the resources and wherewithal to also ensure that they are not cutting down on CapEx in the next few years.

On downside to CapEx-led growth

Implementation is the most important part. There are always executional and implementational risks with capital expenditure. We have actually in the past seen certain areas, roads, for example, have done well. So if you look at where the spend is in the last two years, look at FY22 or FY20, a lot of it is in highways, a lot of it is in railways, a lot of it is in urban housing and urban infrastructure. So execution, for me… The design of the Budget was the appropriate design, given the macro environment, but the main challenge is going to be execution. Not just execution on the capital expenditure side, but execution on the disinvestment side and the asset sale side, because I think of this as an asset swap. But you cross a two-year period, CapEx has gone up 5.8% of GDP, stage 4 effectively by a 0.6% increase in asset sale. So we have to deliver on those asset sales to generate the resources to ensure the CapEx gets done.

So whether India has to be watchful of the markets

I don't think we should judge the state of the economy by markets. I think around the world there is a huge wedge between market evaluations and where the underlying economy is. I think on things like capital flows, we are doing the right thing. There is a huge tonne of capital flows coming in, the balance-of-payments surplus in 2021 could be about $90 billion. Because we run a current account surplus, we have strong capital flows, and it was important I think from a competitiveness perspective not to let the rupee strengthen.

On the impact of oil prices

India being a large importer of oil, there are huge terms-of-trade changes when oil bounces around so much. In the past, we've been a beneficiary of these terms-of-trade changes… Now, as oil prices move up, we'll have to make difficult choices. One is, do you cut excise duties to prevent retail prices from not going up, but then if you cut excise duties then you know it hits the revenues. Then does that mean that you have to cut capital expenditure, which could be more focused on creating jobs, for example? These are difficult choices; there is no right answer.

📣 JOIN NOW 📣: The Express Explained Telegram Channel

Perhaps what we need to do is to balance the costs. It should be shared across all stakeholders here, that beyond a certain point letting retail prices go through actually could impact inflation expectations, then you don't want inflation expectations to go up very sharply especially since food prices for much of last year went up and they affect inflation expectations. Perhaps we want to balance out how much of this is absorbed through higher retail increases, which helps preserve revenues and generates more expenditure, and how much of this is excise duty cuts, which keeps retail prices capped.

The third impact is on the current account and India will be seeing that we are moving from a current account surplus this year of 1% of GDP to a deficit of 1% of GDP, which is not threatening, but that's a 2-percentage-point swing. What that also tells you is that the extra savings that you got in the Covid year, which helped get the government's borrowing programme through quite easily… But this year if you're running a current account surplus, what that means is that the private sector savings-investment balance will adjust, savings will normalise, investment will go up — that's a healthy thing, but that will also have implications for the equilibrium interest rates and the bond markets. So this is a very complicated phenomenon and high oil prices going up affects all parts of the economy, fiscal balances, current accounts. It will have some impact on savings and investments and also on inflation pressures. So let's hope that you don't get a very big pick-up in oil prices because that severely reduces macroeconomic degrees of freedom.

On monetary-fiscal policy coordination

I think the fiscal-monetary mix right will be very important for the sustainability of the recovery. RBI was the prime mover in 2020, lots of rate cuts — lots of liquidity, lots of forbearance, like other central banks. Now fiscal policy has picked up the baton, which was the right thing to do. But now that fiscal policy has come to the forefront, I think it will mean that central banks need to perhaps step back a little bit. We have had exceptionally accommodative monetary policy and I think over time you want to gradually withdraw that, in a very non-disruptive manner. I think now the baton has moved to fiscal, the RBI needs to just step back and in a gradual manner begin to normalise. As the recovery gets more entrenched, you want fiscal and monetary policy to become substitutes. During a crisis, you want them to be complements. But as the recovery gets more and more entrenched through the recovery, you want fiscal and monetary to become substitutes so that you avoid any financial stability concerns down the line.

Transcribed by Mehr Gill, Edited excerpts

More from The Indian Express

The Indian Express
The Indian Express
image beaconimage beaconimage beacon