In an interview with BW Businessworld, Indranil Pan, Chief Economist of Yes Bank said that there is no easy fix for the private sector. Balance sheets of the banks as also the private sector companies are relatively clean and hence the twin balance sheet problem that had historically held back private investments is no longer there.
Pan also said, “This process was helped by Covid-19 when profits surged and enabled companies to deleverage. However, we do not expect the private sector investments to kick-start immediately as the constraint now is on the demand side.”
As the entire world is bracing for economic slowdown and possible recession, how decoupled is the India growth story?
Surely, India is not an island as it is linked to the global world through the trade channel as also the finance channel. We are today in a scenario where global liquidity is being squeezed and this is likely to have an impact on the capital flows to EM economies, including India.
Thus, growth capital is likely to suffer, leading to a possible increase in the interest rates in the economy. Further, exports are likely to be hurt as the global economy slows. Around 36 per cent of India’s exports go to the United States (US), the United Kingdom (UK) and Europe and all these economies are likely to show significantly slower growth in 2023. Indeed, exports have been coming down over the months.
On the other hand, interest rates had to be raised by the Reserve Bank of India (RBI) to account for high inflation, a part of which was imported inflation – mainly due to the supply chain worries of the globe. Domestic private consumption expenditure is likely to remain muted. We expect the above headwinds to lead to a growth slowdown in FY24 to 6.0 to 6.2 per cent, compared to 6.9 to 7 per cent of FY23.
What do you think are the top policy priorities before Prime Minister Modi as well as Finance Minister Nirmala Sitharaman?
We need to take into cognisance that private investment demand will stay weak for some more time until the weakness in the private consumption demand – both external and internal – abates. Thus, the government will have to bear the torch once again to push growth through its capital expenditures and hence needs to find funds for the same.
This is one critical priority in front of the government. However, the Centre will also have to find solutions to the weak capital expenditure growth at the state level. Apart from this, we think that the policy push will continue in the form of spending on rural development. There could be some incentivisation of the agri tech start-ups and try and improve the productivity in the sector.
With the manufacturing sector unlikely to rev up significantly, and with the challenges of job creation being crucial, the government will look at pushing the agri and the construction sector, especially in the rural areas.
While maintaining the fiscal deficit target, what should be the quality of the capital expenditure?
The endeavour of the government has been towards shifting the expenditure matrix towards capital expenditure and away from revenue expenditure. This is likely to continue in the Budget. Thus, we expect the budget to announce a Capex/Revex ratio of around 25.5 from the FY23BE of 23.4.
However, there is some evidence that most of the capital expenditure has been in the road and railway sectors. This has to change and the capex of the government needs to be made more broad-based that could cover the power sector as also developing inland waterways. There should also be some transparency with respect to the asset monetisation plans of the government and where the money is getting spent.
Recently several industry bodies have urged the Modi government to focus on sectors that can bring investment. Can you name these sectors which can help India to grow amid the slowdown?
The government should enable investments into areas that can also enhance the productivity of the economy. Critically, healthcare and education come to mind. However, healthcare is a state subject while education is under the concurrent list.
Having said that, we think that if the government takes the lead in formulating the policies and pushes it to the states, then there could be a uniform nature of development in both sectors across the states. Of critical importance is investments in primary education and the private sector players who are already involved in higher-level education in the country need to be provided with some incentives to even step into primary education.
Further, the government has already provided policy support to various sectors through the production linked scheme (PLI) scheme and course correction can be done wherever necessary. The government had been trying to protect the domestic sector through tariffs, but this course of action should be prevented as it likely hurts India’s competitiveness as other countries raise tariff/non-tariff barriers on us.
Is there anything that is holding the private sector back, if yes, how to fix this?
There is no easy fix for the private sector. Balance sheets of the banks as also the private sector companies are relatively clean and hence the twin balance sheet problem that had historically held back private investments is no longer there. This process was helped by Covid-19 when profits surged and enabled companies to deleverage. However, we do not expect the private sector investments to kick-start immediately as the constraint now is on the demand side.
With a weak demand outlook both internally and internationally, the companies would not want to add capacity till the time there is clarity on the future demand prospects. In my opinion, the government needs to bide time and not act hastily in trying to push the private sector to invest. The government should now more focus on stabilizing growth rather than pushing growth.
What can be done to boost exports at a time when global demand is down?
Similar problems as above exist for the export sector and incentives are unlikely to work as external demand is weak. As indicated above, 36 per cent of our exports go to US, UK and Europe and all these entities are facing prospects of a growth slowdown. The government thus needs to work on the various FTAs to enhance the future export potential of the economy.
Further, the PLI schemes would also help enhance exports from these specific sectors in the times to come. The oft-provided argument that is provided to boost exports is that newer markets need to be found. However, in a world that faces a synchronous slowdown, this is also unlikely to be an easy task.
Can you tell us, what things should be different from the Union Budget 2022-23?
There have been some talks that the Union Budget could be populist given that this is the last full budget before the Union elections. However, I think that the government needs to maintain its credibility in budget-making and avoid making such moves. The government under PM Modi has, over the years, mostly been able to overachieve Budget expectations – which also shows a clear intent of the government towards fiscal consolidation.
The budget maths would not support any large populist expenditure, especially when the borrowings of the centre and the state is already higher than Rs 20 trillion a year, the interest burden of the government is close to 3.6 per cent and nearly 24 per cent of the total expenditures of the central government is earmarked towards interest payments. And this is likely to be a climbing commitment for the government, especially when general government public debt/gross domestic product (GDP) is close to 85 per cent.
What will be the major challenges for the central government to address in the union budget 2023-24?
As has been explained above, the government will have to find funds to continue to push the capital expenditures. This could be facilitated by the fact that the likely expenditure on food and fertilizer subsidies will be lower in FY24 compared to FY23. The reason is that oil prices have dropped while the government has done away with the covid related free food distribution programme under the PM Garib Kalyan Yojana (PMGKY).
However, the robustness of the revenue side could be missing as the real economy is likely to slow while inflation is expected to drop to more reasonable levels. This means that the nominal GDP will not be as robust as the 15.4 per cent recorded for FY23.
Hence, the balancing act could get a bit challenging, even as some of the committed expenditures are likely to go out. In this atmosphere, the government needs to work consistently towards plugging any existing compliance loopholes on the tax side and thus target to expand the tax net wider.
The challenge could also be for the government to explain to the common man why there have been no tax benefits that were possible. Our own budget math indicates that the government could be working with a nominal GDP growth estimate of 10.5 per cent and this would enable them to reduce the GFD/GDP to 5.9-6 per cent levels. Do note, that any consolidation beyond these levels could be counterproductive for growth and hence could be avoided.
What are your expectations from the Union Budget as far as Indian economic recovery is concerned?
A transparent and credible budget is the need of the hour. Containment of the deficit and efforts to bring down the debt/GDP ratio should be the near-term goal. This clearly indicates that the government will have to depend on announcements that are productivity-boosting in nature and hence it is likely to affect the longer-term growth prospects of the economy, rather than adding to the near-term growth numbers. The economy is rebalancing out of the covid and the supply constraints created by the war.
A growth dip is essential to containing the inflation pressures and this has been the objective of the RBI. Any growth-oriented push in the Union Budget can add to the inflation pressures and could force the RBI to tighten the repo rate even further. Overall, we think that policymakers should allow the economy to rebalance for now and take near-term pains in order to achieve stable and robust growth in the future.