It would be very difficult to justify 12% nominal GDP growth: Upasna Bhardwaj, Kotak Mahindra Bank

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, and Upasna Bhardwaj, Economist, Kotak Mahindra Bank, discuss expectations from the Budget , the impact of note ban and GST as well as other macro cues.

Edited excerpts:

What is your broad expectation from the Budget? I know there is a lot happening globally as well, we will touch upon that too with Theresa May statement on Brexit. But do you think this whole thing about pushing domestic growth is where the focus will lie for all governments?

Mythili Bhusnurmath: Yes certainly. On budget, the government is going to have to walk a real tight rope this time because on the revenue front, they really do not know how much revenue they are going to get because they are hoping to see GST coming into operation on the 1st of July.

Immediately, the expectation is that GST will cause sufficient disruption as to perhaps bring down revenues. So medium- to long-term revenues might increase and the government always has a tough time in talking about the budget calculations because every time what they tend to overestimate revenues and downplay the expenses.

Almost any calculations the government makes will get contested but clearly the government is going to try and push consumption because investment is not happening. Private sector investment is just not picking up and the government has a tough call as far as public sector investment is concerned because public investment needs revenue. So unless you have the means to invest, the government is going to find it very difficult to come to grips with that 3% fiscal deficit target for the next financial year. One will have to wait and see. Perhaps the NK Singh Committee will come to the government rescue by proposing a range.

Upasna, what are your first thoughts on the budget? Will the government stick to that deficit for next year? This year’s 3.5% is not in dispute but will the government be able to stick to next year’s target of 3%?

Upasna Bhardwaj: I would concur with you. There are lots of uncertainties when it comes to calculations of revenues in the backdrop of demonetisation. At the same time, we have see how GST pans out. Both these factors will make it extremely difficult for the government to really project its revenues and how they would arrive at a number of 3% or a little higher than 3%.

Definitely as of now. we believe that the consumption boost is a must in the absence of investment and especially with the 4% rural spending so we do expect that there is going to be a broader emphasis on consumption especially rural spending and at the same time, they will continue to provide the focus on infrastructure.

These two will be the broad pillars and they will continue to be the broader pillars for the budget and at the same time trying to maintain a 3% or a 3.2%. We are still finding it very difficult to gauge whether they will be able to arrive at a 3% given all the constraints.

Mythili Bhusnurmath: Hypothetically, if the government does not stick to 3%, it is a little higher say 3.3%, how seriously do you think the rating agencies will take it because that is always a big fear with Indian governments? What will rating agencies do, how will they react? Is that so critical really or will rating agencies a) either not take cognisance or it or b) in any case foreign portfolio investors are now wiser than rating agencies in many ways. So will they completely disregard what the rating agencies have to say?

Upasna Bhardwaj: There are two things to it; we should first look at the fiscal consolidation roadmap from a holistic picture, centre plus states and there if we are managing to consolidate even if marginally, given the kind of structural bottlenecks that we face because of demonetisation, because of GST that is going to be implemented, it will be commendable even if the centre can somewhere deliver a 3.2 or 3.3%.

Rating agencies, would want to probably wait and watch and not really downgrade India just on the basis of that as long as the centre plus state consolidation continues in the backdrop of the various reforms that are being undertaken. In that context, FPI or the foreign investors will also remain fairly cognisant of that as well.

Mythili Bhusnurmath: One of the problems with arriving at any fiscal deficit ratio is that the GDP. The denominator matters hugely and we have seen the IMF also downgrade India’s GDP growth rate not so much for the next year but they have lowered it as compared to the earlier estimates. How much will this really impact the entire budget exercise?

Upasna Bhardwaj: It depends on what is the nominal GDP growth that the government really assumes for the year. We ourselves are not going beyond 11% in our estimates and hence our own fiscal deficit numbers are somewhere closer to 3.3% of GDP. If they were to assume maybe 12% growth for the year, obviously it looks optimistic at this point in time given that we are not really looking at inflation averaging higher than 4.5%. With the kind of hiccups to growth that are expected because of demonetisation and GST in the near term, is negative for growth and it would be very difficult to justify a 12% nominal GDP growth.

Mythili Bhusnurmath: The RBI Governor is going to face a parliamentary standing committee on finance today to try and justify RBI’s stance what they did or did not do on the eve of demonetisation. Do you think the RBI is going to try and redeem its reputation by following on with the rate cut sooner after the budget or is there no case for a rate cut now since banks themselves have gone ahead and let the market have it way by giving more aggressive cuts than perhaps was justified even by RBI’s repo rate cut ?

Upasna Bhardwaj: We are still continuing to believe that at least 50 bps is the rate cut which is likely in the next few months. The timing is a little uncertain but the window of action for RBI lies in the next four to five months keeping in mind the global backdrop because as we go forward global conditions will probably turn more and more adverse and make it difficult for RBI to act. Given that we see significant downside risk to growth because of both the factors that we have discussed -- demonetisation and GST -- and at the same time inflation seems to be kind of anchored within 4.5% in the next six to nine months or probably 12 months.

We do see scope for rate cuts and we are assigning a high probability in February itself 25 bps of a rate cut in February.

Mythili Bhusnurmath: Will the RBI be able to look through the Fed’s action because one of the Fed Governor has said that the Fed will become more aggressive in terms of tightening. Will the RBI hold its horses or will they feel this is the only opportunity that we have got so we need to go ahead?

Upasna Bhardwaj: Like I said, we are going with the possibility of a 50 bps rate hike by Fed but that too is concentrated on the second half of the year and if markets gradually price that in, then it may not be disruptive. Keeping that in mind, RBI does have only the initial few months to act beyond which it may become difficult for RBI to act. So the 50 bps that we are looking for is more likely to happen through June probably and beyond that we see a limited scope for action by RBI.

Mythili Bhusnurmath: One of the proposals that is being doing the rounds as far as the budget is concerned is this concept of universal basic income which seems to be very popular with the economies abroad. Do you think this is the right time for India to go in for something like this and will it be fiscally prudent really?

Upasna Bhardwaj: There are two aspects to it. One is the social security which is necessary definitely for any economy but at the same time definitely it will be at a very high cost. Even if there is a bare minimum per month, if you look at the number of people who will be falling in this net, the calculation suggests it could go as high as Rs 3 lakh crore or so. It would be very difficult for the government to really provide that kind of a network, provide that kind of income to people and hence I am not sure to what extent they would really announce that in the budget.

They will have to do fair amount of deal to ensure that kind of a 3 lakh or a 2 lakh crore of increased income is assured going forward for them to really justify that kind of an expenditure on that front.