'We do not have money to do both rural push & capex'

We are assuming that whatever they announce will subsume some of the pre-existing rural schemes and the additional cost will not be about Rs 700-750 billion (Rs 70,000 crore), Pranjul Bhandari, Chief India Economist, HSBC, tells ET Now.Edited excerpts: 67750740 67736201 67751759 How critical is this year’s budget? How do you expect the FY19 fiscal target to be met? There are increasing concerns regarding fiscal slippage because of the kind of farm sops and other incentives that the government has doled out?I will start with FY19. The fiscal deficit target of 3.3% will be optically met. We understand there have been a lot of slippages in the monthly GST revenues shortfall because of the oil excise duty cut, shortfall in income tax, in spectrum sales and so on. But we also think there are a lot of offsets. For instance, this year, the government is dipping into the GST cess fund which we think will actually offset half the slippage on the GST front at least. Then, it can cut a lot of expenditure. We are already seeing that the capex budget has been cut. A lot of the capex expenditure has been pushed off budget, so that on budget it can be a smaller number than budgeted and also some of the current expenditure, smaller schemes can be cut down quite a lot. All that will have an impact on growth. It will be slow growth but the 3.3% fiscal deficit target will be optically met. So, that is what we are thinking about FY19. Now moving on to FY20, we think there will be some slippage. The government earlier had spoken about a deficit target of 3.1%. We think it will be 3.3% of GDP instead and the main reason for this will be the fact that this is the general election year and rural incomes are doing poorly and something new and powerful has to be announced. We are expecting some sort of direct cash transfer programme to get announced. At this point, we are assuming that whatever they announce will subsume some of the pre-existing rural schemes and so the overall additional cost will not be too much. We are keeping it at 0.3% of GDP, that is about Rs 700-750 billion (Rs 70,000 crore).When you say that about Rs 70,000 crore is the number that you expect, do you expect it via the universal basic income route, by cutting down subsidy on fertiliser or maybe some others? How do you expect this to come up?There are many ideas floating around. It will be very hard for me to come up with exactly what will happen but broadly speaking, some of the contours that we are expecting is that they come out with something which implies a sharing of financial burden with the states so that there is some sort of a split between the centre and the state. There will also be some sort of subsuming of some of the old schemes. Over time, some of the schemes that can get subsumed are fertiliser, the crop insurance scheme, perhaps the MSP as well. But, I think that can only happen gradually.In your report you mentioned that you expect the net borrowing by the government to rise faster than the nominal GDP growth. What does that imply and what does that mean for rates in the system?We expect the gross market borrowing by the central government to be about 6.7 trillion this year, which will imply a 20% year-on-year growth. That is higher than our nominal GDP growth of 12%. Whenever we see borrowings rise faster than nominal GDP growth, it does put some pressure on the bond markets. This year, there is going to be some pressure on the bond market from that front. Of course, all eyes after budget will be on the monetary policy -- whether the monetary policy can step in to bring down some of the pressures on the bond market.Why are you all thinking or considering this interim budget as a critical one? We have just got used to getting excited about the central government budget. It gets a lot of attention but despite it being an interim, it should be watched out for a couple of reasons; one, it does lay out the plan for FY20 which the current government has made so that if the current government were to come back to power, then these are some of things they would do. Second, even if they do not come back to power, this will be sort of benchmark or a statement of accounts that can be used by any government. Third, a lot of things that they announce on Friday will have implications for RBI monetary policy over the next couple of months. For all these reasons, it does hold some importance although we understand it is an interim budget.They have an area where infrastructure expenditure can come down but even SME businesses are not particularly doing well and for that, a capex pickup is needed. Do you expect that along with a rural push, there will be something around the capex lines as well and some pickup which can create jobs as well?I am extremely doubtful about that capex budget rising in a big way. We are a country with limited revenues and we cannot do everything every time. At this point, it seems rural is the focus and I doubt it will leave out too much resources for capex this year. That is unfortunate but this is the truth that we do not have money to do both rural push and capex in a meaningful way. I am expecting a very small token increase in the capex budget of about 0.1% of GDP in FY20 it definitely remains very small.

from Economic Times http://bit.ly/2RriaJF
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