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‘People will forget quality of FY15’s deficit data but…’

Finance minister Arun Jaitley has assured that the government will achieve its fiscal deficit target of 4.1 percent for FY15. Keeping his word, the government recently divested 10 percent stake in Coal India that garnered close to Rs 25,000 crore.

In an interview to CNBC-TV18, Jahangir Aziz, Chief Economist, JP Morgan said if 4.1 percent appears to be a big target to meet despite a 50 percent decline in oil prices and all-time high equity market, there is something seriously wrong with the way the government estimated direct and indirect tax collection. “The focus needs to shift to what we must do with our very low levels of indirect and direct tax collection,” he added.

Aziz also said that the quality of achieving this target may be a worry but now all eyes will be on what the government is going to do from next year onwards. “People will forgive and forget the quality of adjustment for this year,” he concluded.

Below is verbatim transcript of the interview:

Q: We didn’t get a rate cut in this RBI policy but what is the expectation going ahead? How many rate cuts are you factoring in and given the tone of the RBI Governor in the policy gone by, what has your assessment been of how the inflation trajectory will pan out now?

A: They are good news on the inflation trajectory front. If oil prices remain where they are or even move up but move up only marginally and if food inflation remains at these levels, it is pretty much safe to say that the 6 percent 2016 inflation target is pretty safe.

But the concern there is that how many rate cuts would that imply? We actually had 50 basis points rate cut, we thought it will be done in one shot after the Budget.

It turned out that we already had a 25 basis points rate cut in January and so, we have one more rate cut after the Budget in particular somewhere after the February inflation number comes out on March 12. And after that depending upon how food inflation pans out, we might have one more rate cut of 25 but that’s not certain at all.

At this point in time, just one more rate cut at 25 basis points and the argument is that, if truly RBI is interested in keeping policy rates at 150-200 basis points of real policy rates, then the margin of rate cuts is very limited.

Also, it is hard to imagine that if you have the Fed funds rate hike cycle starting let’s say in June or even little later in fourth quarter but continuing throughout 2016, then India can actually have or tolerate a massive widening or narrowing of interest rate differential with the US. This hasn’t happened at least not without having seriously bad implications for the currency.

Q: When and what will stir the capex cycle to life again? When is the earliest we should expect that?

A: We have waited for almost two and a half years for the capex cycle to start and not just that the capex cycle hasn’t shown any signs of life but if you go back to the last two-three years, corporate sector investment hasn’t even kept up with depreciation and this is a serious problem.

The steps the government has taken in fixing the plumbing of governance, the plumbing of approval processing. Those were the necessary first steps and needed to be done three-four years of dysfunctional policy making back in Delhi but that hasn’t really addressed the binding constraints that corporates face and there are several of them from land acquisition to the nature of the PPP projects.

Definitely what’s happening to the leverage and the constraint that they are facing in terms of getting bank lending given the very high leverage of infrastructure companies. Those are binding constraints that need to be removed if we are to see corporate investment picking up.

Q: What do you think the fiscal deficit road map could look like in the Budget? In all likelihood, the government could meet their target but would you worry about the quality of achieving this target because a large part of it has come from the successful divestment of Coal India ?

A: We have been worrying about the quality adjustment for the last three years and this is one more year when we will have to worry about it. What makes this year particularly problematic is that this is not a year in which oil prices; the nemesis of India’s budget was at USD 110 a barrel, right now we‘re averaging lower than USD 50 per barrel.

If 4.1 percent becomes such a big target to meet, with a 50 percent decline in oil prices and equity markets at all-time highs, something must be seriously wrong with the way in which we estimated our direct tax collection and indirect tax collection. The focus then needs to shift to what we must do with our very low levels of indirect and direct tax collection.

Yes, we are going to worry about the quality; it is probably going to be in much lower capital expenditure than in the Budget and so more or less a repeat of 2012 and 2013. Therefore, all eyes should be on what the government is going to do from next year onwards. That’s really the key. People will forgive and forget the quality of adjustment for this year.


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