Brace yourself for high fuel prices over the next year says India’s 17th Chief Economic Advisor in an exclusive chat on Biz Buzz as he highlights the need for revenue to fund the govt’s capex plans. With Budget planning kick starting in North Block, here is a look at what the priorities are for the coming year.
Vikram Chandra, Editorji: Moody’s move to change India’s outlook to stable from negative comes as a big positive, shall we look at a possible ratings upgrade in the future?
KV Subramanian, CEA: Rating agencies are extremely conservative and many occasions have also been behind the curve. Rating Agencies have been disproportionately behind the curve while taking in account India’s fundamentals Moody’s outlook change is a telling sign of the change on the ground. Investors typically have been ahead of the curve and you can see that in the big flows in FII and FDI flows. Moody’s highlights important aspect that the risks from the financial sector has eased out and negative feedback of the financial system in to the economy has toned down. That is a very critical point as the slowdown pre-pandemic was due due to the financial sector. Financial sector reform is the single biggest aspect that is playing out for the economy.
Rajeev Dubey, Fortune India: What meterics need to change from the Sovereign end for rating agencies to be convinced of a full ratings upgrade?
KV Subramanian, CEA: We have done what needed to be done. Historically the 5th largest economy was always AA or AAA rated, now that India is the fifth largest economy it is a BBB rated. As a professor and a subject matter expert I can tell you that there is a conceptual flaw in the Ability to pay debt depends on aggregate GDP not on your GDP per capita. Historically GDP per capita was a good indicator for debt level evaluation but that was before the financial crisis. The rating agencies sticking to their conservative mindset have stuck to their flawed model and we have highlighted this to them. I have no doubt, that this is a clear case of thinking using a broken model.
Vikram Chandra, Editorji: Let us focus on other risks, with Covid risks receding is the global energy concerns the biggest risk you see right now?
KV Subramanian, CEA: While we are still not out of the pandemic , but from October onwards you will see a big ramp-up in the second doses. Two-dose protection has dramatically bought down severity of the disease. The likelihood of a devastating third wave is not very high but I am a consumer of this research so I will caution and say epidemiologists are the best to answer this.
Turning to global energy concerns. Unlike other countries , India has rightly focused on supply side concerns while everyone focused on demand side. We recognised early on that supply side issues in India are far harder to deal with and acted on it. Some of the power sector reforms, mining sector changes will help us enhance supply. What we are seeing is supply side friction across globally economies but India planned for it and recognised the supply side pressures early. But the next couple of months we will have to match supply and demand very carefully after which the measures we have taken will start to kick in. We need to calibrate the next few months very carefully.
Rajeev Dubey, Fortune India: When do you see private expenditure and consumption starting to kick off
Already seeing signs of private consumption starting to pick up. The Q1 consumption grew by 20% though on a low base but it happened despite significant supply side constraints , which show cases that demand is robust. Now in Q2 with the restrictions reduced you are seeing demand not just in the manufacturing sector but also the services sector which is showcased in the high frequency PMI data. On the expenditure side, investment levels in Q3 and Q4 were above 33% which is much above the average. The capex the govt has planned for this year is the highest so far and the run rate is confirming that we will meet the budget target for this year. Even anecdotal evidence supports this, have heard of corporates such as Vedanta, Hindalco announcing large capex plan. Corporate announcements of investment shows that the industry is also seeing the nuance interpretation of consumption picking up .
Vikram Chandra, Editorji: Lets talk a little bit more about the energy crisis from coal to oil and the impact it has having on consumers. What is the governments thought process right now on how to ease this pressure ?
KV Subramanian, CEA: This year and next year expect crude oil prices to remain high, given the OECD estimates it is clear that global demand will remain quiet high keeping prices high. Do not foresee oil prices easing over the next 18-24 months, see crude above the $70 mark sustaining. Price in petrol pumps is of concern because of overall inflation. Currently food inflation is the largest part of the basket and that is easing keeping the basket under check. The govt is talking about what can be done about high petrol prices. But do keep in mind that the capital expenditure has to come from revenues . And that capex expenditure though not as obvious as oil prices and it’s direct impact also affect the common person. Capex spends have a much longer and salutory impact that one must keep in mind.
Rajeev Dubey, Fortune India: The budget exercise is about to kick off what is on top of you mind right now.
KV Subramanian, CEA: Laying out a path of fiscal consolidation while staying the course of capital expenditure that would be a very important point. Post global crisis, there has been a shift in India’s economic thinking and response. India has focused much more on the multiplier and capex model versus the keynesian model of stimulus that the rest of the world is sticking with. India’s innovative policy response shows courage of conviction as it shows much long lasting impact. Focusing on the same path of fiscal consolidation while maintaining capex remains critical. At the same time, we must continue the focus on enterprise policy focused on private industry. Right now the government owns 360 public sector undertaking Once the enterprise policy focused on private sector is taken to it’s logical conclusion the Govt should be left with 3-4 PSUs in 3-4 sectors like banking, defence. To ensure this flow every year we will have to bring PSUs to the floor that we will need to privatise. Asset monetisation policy is another focus as it will raise the efficiency levels in the economy and bring idol assets back into economy.
Vikram Chandra, Editorji: Stock market are roaring to new highs, does that worry you or present opportunity to push out big ticket de-investments such as LIC?
KV Subramanian, CEA: It is a wonderful opportunity to do the divestment that is planned for this year. Financial markets near record high are assessing value of reforms undertaken. Financial experts don’t just look at levels but also volatility to evaluate risk of bubbles. If you look at the volatility index it has been trending down, that has given comfort. For any asset market you can never speak with certainty but the likelihood of a bubble is very low.
Rajeev Dubey, Fortune India: The chatter about rollback of the pandemic liquidity or easy money from the system, what is your take on it.
KV Subramanian, CEA: There are two key aspects to look at here, the Fed has learnt lessons from the last taper in 2013 and is setting expectations very clearly. So unlike 2013 where the taper took a lot EMs by surprise, this time it is ensuring the communication is clear. Similarly even the RBI is doing the same, setting down expectation for the tapering of excess liquidity. We suffered during taper tantrum in 2013 because our key economic fundamentals (current a/c deficit, fiscal deficit, inflation) were quite fragile after the financial crisis. The same economic indicators have turned around due to strong supply side policies and has put us in a much more strong position vs peers and 2013. So even if the eventual taper has an impact it will be temporary and not long lasting.