Money & Banking

‘Push disinvestment, tax reforms to meet FRBM target’

| Updated on January 19, 2018 Published on February 03, 2016

Pranjul Bhandari, Chief Economist, HSBC India

One of the main highlight of the RBI monetary policy was Governor Raghuram Rajan’s insistence that the government's fiscal commitment was critical for easing monetary stance. However, the government faces the twin challenge of spurring growth and adhering to the fiscal consolidation path.

Speaking to Bloomberg TV India, HSBC India chief economist Pranjul Bhandari says the two can be balanced by stepping up disinvestment, pruning subsidies and pushing tax reform, while pushing up public capex.

The RBI has maintained status quo and it was wildly anticipated. The outlook on FY17 growth is just a 20 bps higher than from 7.4 per cent of FY16. Is the RBI being extremely cautious or you think that is the reality that the other part of the market needs to adjust to?

I think that is the reality. And for me it was heartening to see that the RBI is in the line with reality as GDP growth projection of 7.8 per cent for FY17 was looking quite rich. They brought it down to 7.6 per cent. We at HSBC have our FY17 growth forecast at 7.4 per cent. Now the big reason for this is that the one thing that was supporting growth all of last year was this huge benefit that we got with oil prices falling off. Now, this oil bounty is declining this year, we don't really have a big driver of growth as such. I don't think growth will fall meaningfully. I think growth will remain where it is right now, 7.4 per cent, and it will continue to be there over FY17 as things like monsoon pick up, El Nino impact coming off and impact of public capex showing up in macro data. These things will provide some lift to growth. There is a buzz that the government is planning to mop up ₹25,000-30,000 crore through strategic sale in FY17 including stake sales in banks. What are you making of that?

Well that was something, which was required immediately. There are lots of benefits of getting revenues through disinvestment. One is of course that you don't have to run a high fiscal deficit because you have more revenues to support more expenditure. Also disinvestment is below-the-line item in the Budget, which basically means that it is not a drag on growth. If you had revenues, which are coming more from taxes, then that can become a drag on growth. But if you have revenues that are coming more from asset sales, then you do not have that much drag on growth. And this is a positive development that the government is trying to take disinvestment more seriously next year.

The Finance Ministry is exploring the possibilities of resetting the FRBM targets. However, the RBI Governor is making quite a strong pitch that fiscal commitment is a key to more rate cuts in future. How that balance really pans out and which camp are you on?

I must say that India has two big priorities for 2016 — one is to maintain macro stability and the second is to encourage growth. Now macro stability is a funny animal. In 2013, it was all about external deficits — it was about current account deficit which had gone up to 6 per cent of the GDP in one of the quarters. But with that problem now under control thanks to lower oil prices, all eyes have turned to fiscal deficit and what comes along with it is public debt. Public debt and fiscal deficit have become the new indicators for India's macro stability.

Published on February 03, 2016
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