What are the imperatives for Budget?
The primary thing is to adhere to the 4.8% deficit target. To achieve that they should continue what they have started — gradually liberalising fuel prices and trying to contain subsidy prices effectively. Also, there will be scope to broaden the base for indirect taxes. It will be important to build on credible assumption about the growth outlook so it is a believable Budget.
RBI has been worried about the quality of fiscal consolidation…
The scope for high quality fiscal consolidation is very difficult to achieve on this side of the elections. The spending side should be more aggressive on reining in outlays on non-productive areas such as subsidies, which does not look very likely at this point of time. So ideally, you would have to introduce more reforms on the revenue side, get more traction on GST. Over the medium term, it would be important to focus on sustained progress on tax reforms that have been pending for a while. Reining in unproductive spending will help redistributing funds to infrastructure and education.
Are fiscal and monetary policies aligned?
Overall macroeconomic policy combined with stance on monetary policy has to remain tight. So I think the easing that we got from RBI in a sense was building on the assumption that the government will continue on the fiscal consolidation and fiscal tightening. I think it is consistent with that. It opens the door for easing but not that much.
Do you see this as a sustained rate-cut cycle?
Any further easing is conditional on inflation pressures continuing to decline, the structural form agenda moving forward and the twin deficits narrowing over time. So I think these factors will have to move in the right direction to deliver scope on further monetary easing. We think a scope for another 25 bps easing has been built in to come in a couple of months. May be a little bit more but not much beyond that.
Will high current account deficit limit rate cuts?
The current account deficit is a constraint in the scope of monetary easing. It doesn’t mean there is no room at all. The outlook for the current account deficit in the short term is that it will remain quite wide because on the external front the things are stabilising, but overall global economic backdrop is still subdued. So exports will be under pressure. On the domestic front, the oil import bill will remain high.
The step to hike diesel prices is a very staggered approach, so it will have limited impact on consumption. Other steps to address the gold imports will also help to some extent but it will still remain sizeable. One important element on current account deficit is that India’s economy is supply constrained so the ability of domestic companies to meet domestic demand has suffered because of that. There has been an element of income substitution. The reforms we are now seeing from the government address issues related to supply-side constraints. They were also to gradually encourage investments in productive capacity. But in the short term you are not going to see much of a relief on that front. So that’s why current account deficit will remain wide.
What are the achievable targets for 2013-14?
The current account deficit could on an average sneak slightly below 4%. It is not given but that’s possible and that’s our central scenario. On fiscal deficit, we think the 4.8% target would be difficult to achieve. It will depend on what their assumptions would be for divestment proceeds and the subsidy bill. We are currently operating with an estimate based on our assumption slightly on the low 5% for the next fiscal. We are looking at some slippage, which will add to the borrowing programme relative to what the Budget assumptions would be.