The economy is firing on full cylinders, monsoons are good, forex reserves are strong, the current deficit is coming under control, and tax and GDP ratios are looking decent. So, all line items are indicating that we are in a good shape.
Santanu Sengupta: Indeed, I would agree that macro stability has been the hallmark of India over the last 10 years or so. If you compare it to the taper tantrum versus now, all the indicators that you pointed out current account deficit, and inflation are under control.
The fiscal expanded during the pandemic, but frankly, India was not an exception because all other countries also expanded their fiscal during the pandemic, is on a path of consolidation now and we expect that to continue because if you look at overall stability dynamics, the only place where India is an outlier is the debt to GDP in terms of public debt. It is at 80% plus.
It is one of the highest among EMs. I agree that we have high growth, but over some time that debt to GDP number needs to consolidate below 80% and probably get closer to 75%, which is why we think that the government is very likely to stick to the fiscal consolidation path and target 5.1% of GDP in FY25. But the more important thing is that going forward also we expect that consolidation to continue towards 4.5%.
The government has been spending on capital expenditure, the number as a percentage of GDP is north of 3% to 3.5%. Do you see that will continue, that number could get compromised given that the rural economy and the semi-urban economy are under stress.
Santanu Sengupta: No, we do not see a pivot in terms of the government’s expenditure priorities. See, one thing you have to understand is that at the end of the day, your fiscal is consolidating from 5.6% of GDP fiscal deficit to 5.1%. So, whichever way you cut it, fiscal policy is going to have a negative impulse on growth. It cannot be positive. Within that, if you break down welfare spending, subsidies, capex, etc, you are right when you raised your capex from 1.5% of GDP to north of 3% of GDP, that provided a positive impulse to growth.
It cannot continue with that kind of growth rate anymore. So, we think it will flatten out more in terms of percentage of GDP. So, you are likely to be in the region of 15% or thereabouts for capex growth budgeted number of 17% year-over-year after a cut in the previous year’s number. So, you are likely to see that kind of a number for the semi-urban, and rural, which is more of welfare and subsidies. There could be a little bit of a tilt. You are seeing some reallocation of spending from elsewhere, maybe the RBI extra dividend partly gets spent there. But it is difficult to imagine that that number can give a serious fillip to that part of the economy. Again, the important thing is you are moving from 5.6% deficit to 5.1%. So, it is very difficult for fiscal policy to have a positive impulse.The biggest talking point is the new so-called schemes, initiatives, or waivers we could see given that there is expected to be a renewed focus on the compulsions of the economy, which is the slowdown in the rural economy, taking care of the social needs so to speak. Do you expect anything incremental, anything very large to be coming out from this year’s budget, at least on that front, which in a sense has been ignored in the last couple of years?
Santanu Sengupta: In terms of social security net, that has been in the works for the last many years, even pre-pandemic building a social security net in the form of more insurance or a small number of transfers that have been in the works and that probably continues. So, could you see a higher allocation to a scheme like PM Kisan? Maybe, yes. However, it has remained constant in terms of INR nominal terms over the last five years.
So, even if you are increasing, you are catching up with inflation. Again, the important thing is that when you have 3.5% of your fiscal deficit being spent on expenses only, there is only so much space that the government has in terms of giving a stimulus to the economy. So, we would think that the focus of the government is going to be on the rural economy, with a thrust on the food supply chain and inventory management to control price volatility.
If you think about the rural economy and if you think that inflation has eroded real incomes, then the inflation volatility or the price volatility of food especially is something that the government will be keen on containing and that would mean better rural infrastructure for connectivity, cold storage chains or facilities, improvement in the irrigation network, breeding, sorting, food processing, all of that will probably come under focus.
We are probably going to see commentary or incentives on that. Enabling domestic production of a lot of food. Edible oils, we are a large importer so incentives for producing edible oils, pulses, vegetables, and all of that that can contribute to the volatility is somewhere where we are seeing the focus and overall reduction in input cost of machinery.
On the housing front, we have already seen the numbers in terms of the Pradhan Mantri Awas Yojana coming through. We see that continuing, more on slum redevelopment possibly in the urban areas, those are the kind of policy push that we are going to see rather than direct transfer to the households or higher amount of subsidies because the space in terms of the fiscal account is very limited as I pointed out.