Pranjul Bhandari, Chief India Economist, HSBC said the biggest priority of the government in 2020 would be to create a stable tax environment and generally policy environment.
With regards to fiscal deficit, she said he government would need to strike a fine balance in the budget 2020. "A good fine balance would be to stick to the Fiscal Responsibility and Budget Management Act (FRBM) II mandate that you can slip by about 0.5 percent of GDP so 3.3 can become 3.8 percent of GDP but nothing more than that because beyond the point we know it is going to start hurting growth," she said.
Below is the transcript of her interview with CNBC-TV18 Q: A higher fiscal deficit will mean more bonds will have to be floated and given the appetite Reserve Bank of India (RBI) will have to print more money to buy those bonds, in this inflationary phase should we reasonably expect a higher fiscal deficit as one of the things in the Budget?
A: We have to strike a balance, there is a growth slowdown and you need counter cyclical fiscal policy and this year we will see the fiscal policy deficit getting breached. Instead of 3.3 we are expecting closer to 3.8 percent of gross domestic product (GDP) fiscal deficit for FY20. For the next year too I think it will be difficult to bring it down given that growth is weak, revenues are going to be weak as well and you really cannot slash expenditures too much. However, we also have to understand that beyond a point high fiscal deficit is going to hurt growth more than help growth by just keeping the entire regime of interest rates up because of too much of excess borrowing in the market and it will actually hurt us more than help us.
So, a good fine balance here would be to stick to the Fiscal Responsibility and Budget Management Act (FRBM) II mandate that you can slip by about 0.5 percent of GDP so 3.3 can become 3.8 percent of GDP but nothing more than that because beyond the point we know it is going to start hurting growth rather than helping growth. So that fine balance is something we will be looking forward to in the budget.
Q: Last week on Thursday Prime Minister Modi met with 40 economist to discuss or rather to have pre-Budget consultations and I understand that you were a part of that meeting, what was the key takeaway on the measures to boost growth?
A: There were no key takeaways as such, but I think one thing is clear that we are going through a period of growth slowdown and we need a lot of policy certainty out there in order to help growth. Some of the things that I believe we should do in this budget particularly is create a environment of policy certainty by trying to give some indication of where all the different taxes, direct, indirect, goods and services tax (GST) where they are likely to be in their next couple of year. Give some more clarity on where the foreign direct investment (FDI) policy should be and so on - so that both producers and consumers can plan their spending for the next couple of years. This sort of policy certainty is critical to reach the Rs 5 trillion nominal GDP growth target that we have.
Remember that 2019 was marked with a lot of policy uncertainty, for many months people were not buying cars because there were rumours that GST taxes would be cut and so on. I think the biggest priority of the government in 2020 is to create a more stable tax environment and generally policy environment.
Q: What I wanted to know is did the PM say anything, what were his questions or his leads?
A: In these meetings, the government and the bureaucrats are more on the listening end. So it was more suggestions from our end than suggestions on their end, so they were more on a listening mode. In one place we all had agreement that we need to take many steps to boost growth. India has a lot of potential and a lot of good things have to happen this year. There was a lot of positivity, especially around the budget that it will be a budget that will be helpful for a growth in a sort of progressive way.
Q: In that meeting, did any participants suggest lowering of income taxes in order to boost consumption and did you get a feeling that the government would take that suggestion on board?
A: We have been reading in the media that there are calls for lowering the income tax rates from the market quite a lot. But my own personal view is that a cut in indirect taxes will do more good at this point than a cut in direct taxes because it reaches far more people. So that is my own take on this, but we just have to wait and see what the budget throws up. It is very difficult for me to sort of second guess that.
Q: We have this kind of an inflation number, now. What is your expectation? When does it cool off and is there space for cuts?
A: The inflation number looks very scary - the headline print, but as soon as you take out vegetables it looks like much more manageable number of under 4.5 percent. I do think that in the next couple of months as a new vegetable crops comes in, onions have already come in, but we are waiting for garlic and potato - once that comes in inflation will come down quite sharply.
By mid-2020 we think inflation will go down to the 4.5 percent ballpark and at that point, I do think there is space for more rate cuts, I have a rate cut pencilled in for the June meeting. So, an unfortunate spike because it will just lead to uncertainty for the next couple of months but by the middle of 2020, I think things would have stabilised and we will see some easing.
Q: At the end of the meeting with the Prime Minister and all the other economist what is your best bet should we go with an expectation of personal tax cut, what would you think, we as citizens, voters and tax payers be prepared for?
A: There could be some tax rationalisation that helps some consumers and some producers, but we should not expect huge changes in one particular budget because there are fiscal constraints, you cannot have a very high fiscal deficit that actually spooks the bond market, keeps interest rate high and keeps recovery weak. So we have to go with measured expectations into this budget.The best thing this budget can do is not just cut taxes and all of that this time around but give us a good roadmap on where the different taxes will be, what the fiscal roadmap will be, what the FDI policy will be over the next couple of years. I think that policy certainty is something that the budget should give and that will in itself help the investment climate.