Nomura: Farm package, yes, but Budget won't be very populist

Sonal Varma, MD and Chief India Economist, Nomura, is of the view that Budget 2019 is going to be more balanced in populism and fiscal prudence. But it has to create enough domestic tailwind 67770152 67755186 67738133 s to create more jobs, she told ETNow. Edited excerpts:What should be the priority tomorrow – stick to fiscal deficit, do not miss on the headline number, I mean the government may use a lot of financial jugglery to make that number look good. But do you think it is imperative for the government or the finance minister to stick to 3.3 per cent, that is the headline number?Well, the context is clearly that we have more or less with some hiccups say in four years of fiscal prudence and the question is whether it is now fork in the road, given elections, and we move towards populism. The question is, can we balance the two. And our sense is that actually we might see the government balancing the two. This year, unlike FY18, there are not any oneoff like GST and therefore we do think that 3.3 per cent is going to be met. But yes, the rural side of the economy does face a lot of pressure. The question to ask there is, do they need one-time income transfer or there are sort of perennial or perpetual income transfer scheme that needs to be set in place. There are clearly some longer term issues that need to be resolved, but I do not think we have had enough time and discussion on these issues. So our sense is, the government might announce more of a one-time sort of cash transfer to farmers. But the way to balance it out in terms of not slipping on the deficit target too much for FY20 would be perhaps by a bit more aggressive assumptions on the revenue side, sharing some of the costs with the states. Overall, it is going to be more balanced in terms of not too much fiscal slip as the markets are fearing but having some package for farmers. On the whole, we think it is going to be sort of populist talk, but the relatively more prudent walk in terms of numbers. There is the talk right now that this time around perhaps the government is not only going to try and please rural India but also offer perhaps a bounty for MSMEs and even the middle class. What is your expectation there, what could be done here?When we talk about the middle class, we usually are talking about some sort of income tax cuts, slab changes, rate changes, and the like. But given that this is an interim Budget, significant amendments to the Income Tax Act are quite unlikely. Barring the government giving out the vision of what it might do if it comes back to power for the middle class, we are not expecting any big tax changes, particularly addressing the middle class. Now, the MSME definitely is a segment that has faced multiple stress points from demonetisation to GST and then the NBFC liquidity issues. There could be some sort of support for this sector, but that could be in the form of some interest rates waiver or some interest rate subvention perhaps for this sector. Like I said, we are not expecting any big tax changes for the middle income.I know you have addressed the question on fiscal deficit and how the government may walked the path of prudence fiscal management on that front. But let us go with the assumption that they miss the number by a few basis points. So, 3.3 per cent becomes 3.5 per cent and they indicate which is not really something that is set in stone because there is going to be a new government at the helm by then. How much of that would derail sentiment, how much of that would really make investors feel like okay they could have done better?Well, the focus is a lot more on what the government intends to do in FY20 because it is fairly clear that the pressures on the revenue side are quite significant for FY19. Even if they meet 3.3 per cent or the scenario that you are giving that they do not meet, we are getting to that essentially via a lot of pending payments getting pushed out to next year. The way we are achieving these targets itself is sort of questionable and there are medium term risks. We need to look at this in the context of our macro policies in India generally becoming more expansionary. Are macro policies -- in this particular case fiscal policies -- moving towards boosting consumption and taking money away from investment? While there may be disappointment or optimism, it really depends on what the expectation is going into the Budget. The main thing we are looking at is whether the composition of growth in India is going to move more towards consumption and away from investment, which is I would say the exact opposite of what we need at this point in time. Like I said, one is whether the government is able to balance the farm requirement with fiscal prudence and second, what does it mean in terms of growth composition because of course that has broader macro implications not only on twin deficits but also on the monetary policy side.Can I safely say look, this year’s Budget is no different, there would be optimistic assumptions on the revenue front and there would be pessimistic assumptions or low assumptions on the expenditure front. That is how they will make the numbers look good.Well, given the extent of slip we are potentially staring at even in FY19, getting to this number of course means that a lot of payments are getting pushed out to FY20, so yes your point is right. If the government does show a consolidation for next year for FY20, it has to be via fairly aggressive assumptions on the tax front, on the disinvestment front. One will also have to assess how much spending they have budgeted on the farm package and some of the regular payments they make. Of course, we will be going through how credible the numbers are and in general, it does seem to us that the consolidation perhaps might be based on fairly aggressive revenue assumptions. Two years ago Finance Minister Arun Jaitley gave goalpost for where the corporate tax rate would settle and he has to follow a glide path. He has reduced corporate tax rates after that. Do you think in this Budget, corporate tax rates have to go down, otherwise they will not achieve the glide path of 25 per cent that was indicated 2-3 years ago?Well, we are definitely not expecting this. I think clearly the glide paths have changed not just for the corporate tax but even for the fiscal part, given the shortage on the GST front. The extent of GST shortfall we are seeing right now really constrains the government in terms of giving too many fiscal tax sops or reductions right now. Given the fiscal situation which is fairly constrained, there is no space. This may not be directly within the Budget statement, but the data that have come out from the National Sample Survey Office which looks at Periodic Labour Force Survey has highlighted that unemployment in India has reached 45-year high at 6.1 per cent with youth unemployment being much higher and there being a case of severe joblessness in especially rural areas. What the government is doing is of course plugging the gaps and handing over money in the hands of people associated with the rural economy, but it is really at the core about bringing in productivity gains and creating more jobs. Can the Budget address that issue?The thrust of policies since 2014 has been one on building public infrastructure in various spaces, all sorts of logistics, transportation network, and the like.Second, there is the entire Make in India, do not import, produce it domestically, let us create domestic manufacturing facilities for defence or railway locomotive or be it electronics.Third, job creation in India cannot just be in the manufacturing sector. It has to be but cannot solely be there. You need to also create more jobs in the services sector and there is a certain level of skill training that the segment of the population requires. Even if you are trying to address the rural concerns on the farming side, one of the options is to get migration of workers outside of farming which tends to see low productivity into some of the non-farm activities, which requires creating opportunities there. So, there is a whole set of things that need to be done. In terms of government efforts, some of this has been done and is work in progress in terms of public infrastructure. A lot more needs to be done in terms of creating manufacturing facilities or skill development. It is clearly work in progress and one thing that has become very clear is that the global growth environment is looking like it is going to slowdown clearly in the next 12 months. The challenge for us is we do not need to offset the global headwinds but create enough domestic tailwinds to be able to create jobs. It is a much bigger challenge. The Budget, of course, is quite limited in terms of what it is going to do. But it is the broader thrust of policy that becomes a lot more important.At a time like this, given all the parameters we have discussed, where do you see the yield in the currency headed because there is a fresh concern on liquidity as well, especially with NBFCs?As far as the Budget is concerned, there are clearly fears of a very populist Budget. It is not going to be extremely populist. Yes, a farm package but a lot more balanced Budget. It could be slightly positive relative to expectations of huge populism.But there are two concerns that we do have beyond the Budget. One is growth outlook. We do still think that expectations that growth is going to be able to sustain above 7 per cent in the 12 months look very difficult, given the global slowdown and the domestic political uncertainty, which is going to negatively impact investment. Second, the political uncertainty itself is going to have an impact. The growth disappointment and the political uncertainty to our mind would mean higher risk premia for India and that could weigh on the currency into the elections. But the growth outlook is positive from the bond yields perspective because we have the RBI policy meet next week. While we do not think the MPC is going to change the policy rates, we do think they are going to change the stance back to neutral. Sometime in the third quarter of the calendar year, we do think that benign growth and inflation environment would set the stage for a rate cut in India. Directionally, that is going to be positive but for now, of course, we need to navigate the headwinds that are there.

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