GST, pay panel award potential game-changers for markets: Sudhir Agrawal, UTI MF

In a chat with ET Now, Sudhir Agrawal, Fund Manager (Fixed Income), UTI MF, shares his outlook on the economy in light of the GST tussle. Excerpts:

ET Now: How are you looking at this currency fall? Do you think this is just a technical reversal, or is it a structural fall given the fact that overvaluation is warranting a correction?

Sudhir Agrawal: I will go with the second. The rupee has been overvalued for a long time. It was hurting India's export growth as well. So, such an orderly kind of depreciation was very much required. That is what is currently happening.

As far as our currency moves in line with other emerging market currencies, there is no need for any worry. Besides, things are likely to smoothen in a step-by-step way. So, there is unlikely to be too much volatility.

Overall, economy fundamentals are under control. The current account deficit is in check. The broad view on India as an economy remains positive. Decent amounts of flows are coming into the debt market too.

Based on all this, we are not expecting any immediate sharp depreciation in the currency. But it looks set to continue moving with other emerging markets currencies.

ET Now: Do you expect any bill to be passed during the Winter Session, or are we staring at yet another wasted session?

Sudhir Agrawal: It is difficult to say. I do hope for some progress though. It is very important for the country that some progress comes about.

Post the last pay commission's recommendations, there is fear that our fiscal deficit might just spike. This makes a bigger source of revenue necessary. The only way this will be possible is by increasing tax compliance. That, in turn, will be possible only if GST is introduced on time.

So, it is crucial for the GST to get cleared in this Session itself. We are all hopeful that the government will try and find some way to get it cleared.

ET Now: The current weakness in the rupee is perhaps a pointer to this lack of consensus on GST. Your take?

Sudhir Agrawal: Some bit of that is already priced in. And it was anyway expected that the bill would face hurdles. Now it all depends on whether the bill is able to clear those hurdles. But any which way, some bit of it is already there in the pricing.

ET Now: If GST does get through, what repercussions do you expect on the markets and the economy?

Sudhir Agrawal: The first thing to note is that they are working with a revenue neutral rate. So, the expectation is that whatever rate they set will be close to what gets the government the same kind of revenue.

But now the only hope is based on the fact that to claim your input benefit you will be declaring your input cost, in which process a part of the parallel economy will move into the mainstream economy, as a result of which you will actually see overall tax compliance rising as an outcome of GST.

That is likely to mean higher revenue for the government. If that happens, it will definitely be very positive for the market because fiscal deficit will come down.

The second fact is that the government will have more money in its hand to prop up growth. It can then spend more on capital projects. That will overall be good for the economy.

GST's potential impact can be big. If it does get cleared, markets are sure to cheer up in a big way.

ET Now: What are you pricing in in terms of rate action going forward, given what may happen with the US rates?

Sudhir Agrawal: We are not expecting any action on rates in the first week of next month. The RBI will be able to act only after looking at the budget numbers. So, we expect RBI action to be on hold at least till the budget.

On the Fed side, we are expecting a rate hike by mid-December. The US economy is lifting up; unemployment numbers there are low. Given where the US was in terms of growth and unemployment in 2008, it will not actually be a rate hike; it will be only normalisation.

But having said that, the Fed will remain cautious. The rate hikes might not be steep; it will likely be done in a measured way.

ET Now: Do you expect the economy to revive from here on?

Sudhir Agrawal: I do think so. The two big factors for growth from here on will be – the pay panel award and the GST. The pay panel award will put more money in the hands of a huge number of people, which should lead to bigger spending.

So, there is likely to be a demand-driven increase in activity. That might encourage manufacturees to raise investment, which might start a growth phase.

Talking of GST, if it really does come, it will be a big bonus — a big booster for markets.

ET Now: Let's talk macros. The view is that the pay panel award could wreck India on the fiscal deficit front. What are your broad projections for FY 2017?

Sudhir Agrawal: Meeting targets for this year is not a problem. The 3.9% target the government has for the current year is likely to be easily met.

The question mark really is on the next two fiscals, for which the government has been looking at 3.5-3.6% and 3%, respectively. That looks really difficult.

The spending on salaries will go up while growth could continue to be a worry too. So, it may be that the government won't try to curb deficit in an out-of-way manner. They might just go easy on the target.

We expect the target for next year to be in the range of 3.7 to 3.9%. The government will have to depend on revenue growth, which can viably come only by way of economic growth. That is why the GST and other such laws become so crucial.

ET Now: The euro is languishing at seven-month low. What is your view on the currency?

Sudhir Agrawal: One reason for it is the general strength in the US dollar. The US is poised to raise rates at a time when the ECB and some others are looking at more quantitative easing. That has given rise to a clear possibility of a lot of money moving towards the US.

That is why we are seeing the euro weakening. This is some kind of a general phenomenon.

Another issue is that European policymakers would now like their inflation to move up significantly. It has become very important for them to get some inflation back into the system. One way of doing that is by weakening their currency.

In that sense, our expectation is that the ECB might be forced to take some steps to try and weaken their currency more vis-à-vis the dollar. That looks like the only way inflation would be back.