Quality of deficit is as important as quantity: Sajjid Chinoy

If you run elevated public sector borrowing requirements, something has to give and that something has been in 67772893 67772353 67771647 the last few years a progressively steeper yield curve, says . Sajjid Chinoy, Chief India economist, JPMorgan, talking to ET Now. Punita Kumar Sinha, Managing Partner, Pacific Paradigm Advisors, Sajjid Chinoy and Samiran Chakraborty, Chief Economist, Citibank, talk to ET Now on expectations from the interim Budget.Edited excerpts:The fixation that the market has with the fiscal deficit target, now I call it fixation because if you look across the globe a lot of economies are contesting with high deficits at this point in time so why is India being singled out and at a time where there needs to be some momentum that has to push growth forward a fiscal deficit slip of a few basis points should not really move the needle on the markets, your sense?Punita Kumar Sinha: Yes, I actually agree with what you are saying. There is an overly red line being drawn on this fiscal deficit number. First of all, fiscal deficit is not just a question of expenditure, it is also the revenue and what the GDP growth would do and a lot of it is based on predictions of the future and also what happened in the global economy. It is really not just what is announced in the budget but we also have to be pragmatic, look at the state of the economy, look at what the electorate wants and we also need to be sensitive to all the different constituencies. We have to be sensitive to the farmers, the middle class, the SMEs as well as the corporate sector. Everybody has his own demand so it is always a balancing act and you have to keep in mind this is an election year and all governments in a year like this would be pragmatic so if there is some slippage on the fiscal deficit side I do not think one should be overly concerned because if the economy grows then those numbers might actually end up being better than what appears today. There is no denying that revenue is indeed under pressure. When growth is just about picking and things are extremely uncertain on the economic landscape, what sort of an impact could this have on the growth trajectory and the economic activity?Sajjid Chinoy: The quality of the deficit is as important as the quantity. What we have seen this year is we have been a bit disappointed on GST collections. Frankly this was not so unexpected, we had worried last year that the assumptions on GST collections this year were a little bit ambitious and we have seen over time that GST collections have undershot. The hope is that compliance on the GST is quite low which is why I think you are also seeing currency in circulation of the economy rise quite rapidly this year and the corollary of that is deposit growth into the banking system has been quite soft, incremental credit deposit ratios are rising and that is putting pressure on deposit rates. For me, the starting point next year has to be after the election that we really keep chipping towards increasing compliance on the GST. If we do not get that, we are going to be in this perennial fiscal problem. We are constantly cutting expenditures, we need for GST collections to go up for those targets to be met and if that were the case I think then you potentially can have a reasonable growth of expenditure next year and especially if any farm income support replaces existing subsidies the math can work out. This year the disappointment has been on the GST collection and therefore the opportunity and challenge for the next year’s budget or the next government is to ensure that those compliance rates of GST go up and revenue collections rise.An agri package has been widely reported and it looks like markets are coming to terms with a possibility of one as well. It is going to entail some cost, what happens to expenditure, is it a given that with no robust revenue in sight expenditure is going to be slashed to stick to fiscal consolidation?Samiran Chakraborty: When you look at the expenditure profile in the last five years, the expenditure to GDP ratio has been brought down by almost 1.5% to 2% of GDP and after doing that now if you look at the profile of the composition of expenditure what comes out is that almost 75 to 80% of the expenditure is extremely sticky, they are almost like committed expenditures on wages, pensions, interest payments, defence expenditure, capital expenditure. The ability to switch expenditure is not that much there and because we have already done significant expenditure compression in terms of almost 1.5-2% of GDP over the last five years the space for expenditure reduction is that much lesser this time around. We will have to really be quite bold in going after even things like fertiliser subsidy etc if we really want to trim down further on expenditure so that makes the job of announcing a separate package that much more difficult. Will the market be obsessed by the fiscal deficit numbers? The finance minister has a very small elbow room to juggle the number.Punita Kumar Sinha: It is hard to say. The market is made of many participants, how each one thinks could be different than the other one. But in general, a couple of weeks ago finance minister Arun Jaitley said that while he was very committed to the fiscal prudence and the fiscal deficit numbers, we also have to be sensitive to the fact that only in exceptional circumstances would one cross the red line and maybe violate that 3.3% sort of number. What we have to look at is do we have any exceptional circumstances today that would merit having a higher fiscal deficit number than the 3.3%? That is what the market should be focussing on and probably will and there is definitely farm distress. I am on couple of boards of agri companies and we do see that the monsoon prediction again this year is not very good. The farmers are not able to sell what they produce easily and there is definitely demand from them. The question is, can the government give a package to them and take away from somewhere else? That is what we are going to have to see and definitely it is not the just farmers, we also have to look at the SME sector which has some pain points. The corporate sector is demanding a lower tax rate and the middle class obviously is also demanding some tax breaks. All of those probably can be managed if the economy grows and our GST collections pick up. It may not mean that the fiscal deficit number will be much higher, but if growth picks up down the road, a small slippage may not matter much.The finance minister Mr Jaitley a few days back had very categorically stated that if there is a lifeline given for a sector which is going through some amount of pain and employees a lot of people, contributes to the GDP, the markets will be able to understand a farm relief package. If that breaches the fiscal deficit, they will be able to differentiate between what is a pragmatic rational move and a populist move. Do you believe that is going to be possible?Sajjid Chinoy: Markets are not always very rational so it is hard to see what they will glean out of it. The fact is, in the last few weeks, we have seen some pressure on Indian bond yields despite expectations of a rate cut in the next few months suggesting there is some fiscal nervousness. We saw that a little bit on bond yields. You have seen that a little bit on the currency as well in weeks gone by. But again the government has got a good track record on the centre’s deficit. I do not think there will be a major breach. The reason markets are nervous is not so much that it is the centre’s fiscal profligacy, it is the fact that state deficits have gone up, which is ultimately issuances that the market has to absorb. One could argue that public sector borrowings have gone up now for good reason. They are financing capital expenditure. But it is issuances that markets have to absorb. We are in a situation what I call a fiscal trilemma where on the one hand we want to reduce financial repression and bring down SLR ratios for banks which is a good thing. On the other hand, we are justifiably wary of more foreign participation in the bond market which is also understandable. But if you take these as given, then if you run elevated public sector borrowing requirements, something has to give and that something has been in the last few years a progressively steeper yield curve. It is in this context that policy makers need to be cautious. I think some amount of small slippage for a well targeted income support scheme that overtime is going to replace existing subsidies I think is understandable. But if there are large slippages and market sense that there are new unfunded liabilities coming up in a time where GST collections are undershooting, that could lead to some nervousness.

from Economic Times http://bit.ly/2Rxu0Cl