Focus is already on next fiscal year: K Harihar, First Rand Bank

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor and K Harihar, First Rand Bank discuss the macro cues

Edited excerpts:

What exactly do you make of these numbers because the full note ban impact may be seen now with a lag.

Mythili Bhusnurmath: The numbers that we are going to get later this evening are an estimate and it has not been so much as an estimate as an extrapolation of the actual developments for the months we have data. All the data that we have is for the first half of the year which is 7.2% as per finance ministry. The RBI estimate for the year as a whole was 7.1%, down from 7.6% earlier. The CSO will not really give anything less than 7% because this is an estimate and they can always say that it is based on whatever data we have till now. which is not very much. IIP has always been notoriously fickle and not reliable.

The CSO would be quite safe to project a number of a little over 7% purely from the point of view of arguing that this is the case based on the data that we have at the moment and based on the fact that we do not have enough data points after demonetisation. I doubt if the CSO will give you a number less than 7%. The reality is that we might end up with a number well below 7% but the CSO today will not stick its neck out and give a number of less than 7% because remember they have a perfectly justifiable reason for saying why it will be 7 or about 7.1% but that is my view.

Mythili Bhusnurmath: Do you agree that CSO as a government organisation could justifiably argue that the number will be 7% or 7.1% and will not stick its neck out and say it is less than 7%?

K Harihar: I would agree with you completely that being a government organisation they are not really in the business of forecasting like a metrological department. So they are clearly going to look back in a pre-demonetisation kind of situation and therefore quoting a 7-7.1% is probably smarter rather than trying to either be over optimistic and say that the demonetisation did not impact large parts of the economy which were dealing via cheques or that agricultural over production will compensate.

There is too much guess work involved and as you mentioned earlier, the Reserve Bank of India in the last credit policy sticking their neck out and forecasting a 7.1 which in a way kind of build in a slowdown in the last two quarters with earlier quarters printing 7.3 so it would have mathematically been printing at below 7 and getting it to 7.1.

So in the bond markets, we believe the CSO would come out with a number which is more in alliance with the official numbers and thereabouts which is in the 7-7.1% and allude to the fact that the demonetisation has impacted parts of the economy but it is too early to probably quantify the impact of that.

Mythili Bhusnurmath: Yes, because the advanced estimates are essentially in extrapolation, but how much do you think will impact the entire budget exercise because the sanctity of the budget exercise depends on what kind of GDP number you have. Contrary to the normal years when you also have a provisional estimate for the previous years, on 31st of January you usually got the revised estimates for the previous year. As this time, you do not have that, you do not have the latest numbers in for the IIP for December, November. You do not know how much this will impact the budget exercise.

Will the budget estimates be gross over estimates? What kind of correction will we see going forward because in the past the CSO to its credit one has not seen too much of difference between the provisional estimates? The advanced estimates and the revised estimates are a fairly good exercise whereas in the next fiscal we are going to see perhaps a huge difference between the advanced estimates, the provisional and the revised estimates. How much does this impact the sanctity of the budget exercise?

K Harihar: I will put it this way. One hears a whole lot of news on services. Services are a large part of the GDP. So when 60% plus growth component out there in the GDP is starting to slowdown assets evident from the numbers that came out a bit earlier, the market is worried.

So the ultimate GDP number may be much smaller. From the treasury and bond markets, we are looking at two separate points of view. One is how much the GDP slows down this year so that when we ultimately make the numbers for March 31,st is the fiscal deficit number as forecast by the government or is a denominator going to play a little bit out of whack and therefore the denominator may probably be smaller and fiscal deficit could be larger?

The only signal that we are getting from the government is that they actually cut down the borrowing numbers for this month and next month. Now you can only do that when you are in powerful control of your revenues and you are very clearly seeing the visibility of those numbers. The bond markets find it very comforting that at least on the numerator side. they are seeing the revenues especially on indirect tax going up in a very strong way.

If the gross borrowing and the net borrowing numbers of the government is actually lower than what they forecast then there is enough space on the denominator to account for the GDP slowdown. Coming to next year’s budget, that is going to be a different exercise and some of us are willing to give benefit of doubt to the government. When a whole lot of the so called shadow economy is going to turn into the above ground economy and is going to deal in cheques or electronic payment etc, it is very logical to assume that a large part of that economy will start being taxpaying once it is visible.

So there is a decent ability for the government to either at least project a higher revenue for next year based on the large parts of the economy catering to the visibly taxable economy or at least hope that a large part of this comes up as a revenue as a year goes by that gives them a lot of buffer. So while this year we are not expecting the old assumption that there could be a large part of the currency which stays out of the economy and could come in as a dividend.

Now that the possibility is less to the extent that the government is able to tax the money that has come into the system, you will still see some money coming in but probably time is a factor and therefore not too much may come in this year .

So from a bond market perspective, we are not too worried about the next year because we see a larger scope for revenues coming up as larger part of the GDP gets out of the shadow into the normal one and we see a little bit of scope not for the dividend payment as expected earlier but for a larger tax base to start contributing to the national economy.

We would either see the government trying to shoot for a lower fiscal deficit number based on a larger GDP, which is logical, looking at the gross borrowing and the net borrowing requirements where if they showed a smaller amount, that will be very positive for the market.

Alternatively, they could keep the gross and net borrowing requirement the same as last year but used the surplus money to spend on infrastructure which again will be seen as a positive from the GDP point of view.

From a bond market perspective, we are going to ignore the little bits of ups and downs that is going to happen in this quarter as well as the numbers for the December quarter which comes in but focus is more on the next fiscal year where the market is a bit more comfortable as remonetisation is already at 44%.