Ace economist Sanjeev Sanyal, Deutsche Bank’s Global Strategist, believes that the Union Budget 2015 lays down the groundwork for “a multiyear process” but adds that he would wait to see how the various changes outlined in it pan out on the ground.
Attending a Deutsche Bank conference, the Singapore-based Sanyal said now the Reserve Bank should cut rates – and while he expects a rate cut of about 100 basis points (1 percent) — he said there was scope for a full 2 percent rate cut.
“Inflation has come off quite a bit. A large rate cut will reduce the government’s borrowing cost as well as help banks by liquefying their balance sheets [thanks to treasury gains],” he told CNBC-TV18’s Menaka Doshi.
Below is the transcript of the interview on CNBC-TV18.
Q: Do you think he has done enough to alleviate the short term pain that India Inc is suffering? We have come off a really tough earnings season. On one hand we were expecting that he will do enough to kickstart investments, he has done a bit but he has also raised the tax burden especially for the next year or so, what do you make of the short term impact?
A: The focus of this Budget was very clearly longer term, laying the ground work for multiyear process. So, really the emphasis wasn’t on the short term. They have enhanced a fair number of infrastructure spending things. It also came through in the Railway Budget. The emphasis is in the long term, so in the short term they will be relying to a significant degree on reduced interest rates which there is plenty of scope to do.
Q: I get that it is a Budget that sets out long term targets and I appreciate the long term targets especially the long term vision for tax policy etc but instead of alleviating the short term pain which it doesn’t do it has added to that. That is what I was seeking a response on. For instance does that change your outlook on earnings for this year or next for corporate India? Does that change your outlook on how quickly we will see a recovery in private investment?
A: As I said the emphasis was entirely on the long term and yes, there are few things. For example spending plans on investment project which they will begin kick-starting quite soon. There is this feeling in the document that really India requires a much longer term vision that has to be done one step at a time.
It is not about the big bang. That was emphasised repeatedly at the speech on other places that this is the moment where they are going to take the pain if necessary but frankly the economy is growing at some clip whether you agree with the gross domestic product (GDP) number or not it has got some momentum in it and if we bring down interest rates it can be kept going while these longer term things are being implemented.
Q: The infrastructure spend that they have announced at the cost of deferring out or pushing out the fiscal deficit target is that going to be enough of a starter to get private investment back?
A: I think yes. There are several interesting plans but railways was a particularly interesting area that they have given a focus. As I said, it is in the doing that really matters. If they do all the things they have said in the Railway Budget and in other places then it would be fabulous. So, it is really about rolling up their sleeves and hammering the nails in.
Q: So this Budget hasn’t lead you to revise your earnings expectation from corporate India based on not big enough public spending amount and based on higher tax burden, it hasn’t?
A: I wouldn’t say yes or no because quite frankly…
Q: [Interrupts] It would have had some impact on the way you look at earnings for the next year or so?
A: It has definitely made me feel very much more positive over the longer term, there is no doubt about it. Shorter term, I am not sure because as I said it really depends on what the next few steps are. It is really about hammering in the nails and I need to know exactly how that goes about.
Q: You have put the burden of the shorter term fix at the door step of the RBI. The consensus was at the beginning of this year that we would see may be about a percent in terms of interest rate cuts through the course of the calendar year of 2015. Would you subscribe to that or are you expecting even bigger cuts?
A: I think the potential for even bigger cuts is there because inflation has come off quite a lot. Unless oil prices again zip back to where they were a year and half ago I think non-food inflation has come down very significantly.
So, there is scope for very large interest rates, question is will that weaken the rupee? My view is that it will not. There is scope for large reduction of interest rate and the rupee staying where it is and even perhaps appreciating if the economic momentum gathers pace.
Q: How much in terms of an interest rate cut are you expecting 2015 or what do you think the RBI should go all the way to?
A: I don’t know what they will do but there is scope for doing 200 basis points.
Q: 200 basis points this year?
Q: So you are putting the entire burden of kick-starting the economy at the RBI’s doorsteps?
A: No, it is not. This is a very big deal.
Q: You have excused the government for inflicting more shorter term pain and you are putting much of it on the RBI’s doorsteps?
A: No, it is circular. Who is the biggest borrower in the system, it is the government. You reduce interest rates, it immediately gives us enormous space to the government to spend more because borrowing cost follows.
Also remember what is happening to the banking system, what is the fastest and easiest way to liquefy the banking system get the credit process going is again to reduce interest rates. Banks are sitting on huge portfolios of bonds. They will immediately appreciate and liquefy their balance sheets. So it is a very important ingredient of what needs to be done right now. It is a necessary, not a sufficient, but a necessary ingredient.
Q: How would your equity strategy change for the year for India now that the Budget is out of the way?
A: We largely got what we expected. Of course as I said I do expect significant monetary easing but then we also need to see the actual spending on these projects. We can announce many things but what actually gets implemented is key. That is why I said it is all about in the implementation. That is also true about many of the other things, there are lot of things being talked about, creating a holding company, making appointments in the public sector banks and all that kind of thing, it is all in the implementation.
Q: However not enough capital for banks given his constraints, right? So, the big problems didn’t get tackled but a lot of the other equally important things…
A: [Interrupts] Even if they reduce the interest rates, it immediately liquefies the banks. That is why it is a critical ingredient in this whole system. If you do not bring down cost of capital very significantly you cannot have an investment based growth model. It is as simple as that. The whole model that the Prime Minister Modi has is premised on an investment driven growth model. So, you have to lower the cost of capital, it is as simple as that.
Q: I do not know about 200 basis points but if we get somewhere close to 100 basis points in terms of interest rate cut and if the government is able to successfully sort of atleast implement some of the infrastructure spend that they have spoken off and get moving on all the other stuff are you expecting that this year will give us gains in the equity markets, the same kind of gains that we saw last year or slightly less than that?
A: You will get significant gains, I would not put a number on it but it is a mix of those things. I personally think a 100 basis points is very doable, I think it will be more in terms of interest rate cut.
Q: You won’t give me an outlook on the Nifty?
A: Saying that the Sensex will go over 30000 is no longer a big deal, we are almost there.
Q: You like a lot of things in the longer term. You want to spell out to me what you think is transformational in this Budget in the longer term?
A: Fiscal federalism is a very big deal. Of course more money will be given but even where the centre is pushing out the burden of spending on to the states it is still a very big deal because it is much more efficient for many things like social sector spending etc to do it locally.
So simply the decentralisation of the process as a big theme is happening and I am very pleased with that. So, that is a very big thing. Again going forward when investors invest into India they will pay much more attention to which state they go to and this whole business of getting states to compete with each other and all that this is now a serious deal. So, that is one.
Q: That is one big one.
A: The second big thing is that the whole financial monetary area is now getting a proper firm standing. So whether it is the public sector banks getting themselves into the holding company, their appointing system getting formalised, whether into the monetary policy committee that is being created or the public debt management office or the bankruptcy laws that are being put in place.
You may argue again that there were certain provisions. Yes you need to get the court system moving faster. All of that I agree. So there is a lot about the implementation that I agree but this is a very big area. Even if they do a half decent job it would radically change capital allocation in this country.
Q: So those are the long term pluses. You have already told me that directionally you don’t expect the rupee to depreciate in any big fashion even if we were to see up to 200 basis points cut.
A: I am talking in a basket basis.
Q: That predicated on what price is crude though. Are you expecting crude to stay around 60, when you say that?
A: Anything below USD 70 is par for the course as far as India is concerned. Obviously those are very significant that changes the dynamics but then that will change the dynamics of many things else in the world as well. So, anything within plus USD 10 on either side of what it is now is good.
Q: It seems this week at least benign to some extent we seemed to have gotten past the worst regarding Greece. We seem to have gotten some very dovish comments coming from Janet Yellen. This weekend, yes of course we saw the China rate cut come through and that is going to be the one big question mark facing the global economy but do you think that the global context is benign enough for the fund flows to continue to India in the same momentum?
A: Yes, the capital will remain cheap and what you are going to see is interestingly a return to global imbalances. Basically what is going to happen is that the US will continue to grow above – so basically expect three percent plus growth coming out of the US. This will begin to suck in capital at some point simply because US, infrastructure capacities etc at some point they will begin to invest in it. They will go back to running large current account deficits meanwhile China will slow down very significantly. It is already happening, it is expected over the next five years to slow down ever further and that will mean that we generate enormous current account surpluses.
So what will happen is that you will get global growth but also return to imbalance which as I have argued over the years is not necessarily a bad thing but it will also generate enormous distortions. It is a question of managing those distortions but in the meanwhile the huge amounts of capital coming out of China over the next decade or so will keep the long term capital cheap for the world even if central banks begin tightening and that is the opportunity for India and that is why I keep coming back to the issue of a lowering interest rates in India. The world is awash with capital and will remain awash in capital in the foreseeable future. So there is no reason for a capital starved country like India not to go out and get on with it.