Government should spend only if it can raise more revenue: Pranjul Bhandari, HSBC

In an interview with ET Now's Mythili Bhusnurmath, Pranjul Bhandari, Chief India Economist, HSBC said that the government should spend only if it can raise more revenue. Edited excerpts:

What do you see as global headwinds? Are there any tailwinds at all, particularly as far as India is concerned?

Pranjul Bhandari: We are in the middle of two worlds at this point, the world which we left in 2015 where the forwards curves were actually pricing in oil at about $45-$50 and the world which greeted us in 2016 in January, a world which is showing us forwards at $25-$30, now there is a lot of difference between two. If oil is to stabilise between $30-$40 for the rest of the year, it can actually have huge implications for the inflation rate in India and also for fiscal policy. So our estimates show that for every $10 lower oil prices, CPI inflation can be about 30 bps lower and if you use Governor Rajan's real rate mathematics that actually opens up space for about 25 bps rate cut automatically.

So that is one thing we need to be abreast about. The other is savings on fiscal, with oil prices slumping, the government did not let all of it pass to the final consumer, roughly speaking it let about 50% go into lower CPI inflation and the remaining 50% it took in terms of higher excise duties. Now if that trend were to continue at this point and oil stabilises at between $30-$35 then the government can actually save about 0.3% of GDP on the fiscal front which would make the fiscal consolidation much more easier than we had imagined back in December. If oil does stabilise at low levels $30-$35 we are actually looking at a world in which we can have a little more fiscal and monetary policy space.
Considering these gains from fall in oil prices, how much scope does the government really have as far as public investment is concerned, especially when private corporates are not investing? Does it seem the upside gains are very limited for India compared to what they were in the past when prices fell from $110 to $40?

Pranjul Bhandari: I agree with you that the gains will not be as large as they were when oil fell from $110 to $40. You know $40 to $30 would be lesser but it would be some gains on the margin rather than zero gain. The second is what does the budget really want to deliver this year, I think there are two priorities for the government; one is to maintain India's macro stability and second is to revive the growth. The export outlook is not exciting and there are no private investments given that we have global headwinds. Therefore the government really wants to do its bit to revive growth.

But the funny part is macro stability and growth on good days move in the same direction. They form a virtuous cycle but on bad days if any one of them slips it can actually drag down the other. Just taking a step back on macro stability, it can mean different things at different points. In 2013 during our taper tantrum months, it was all about current account deficit because that was the biggest vulnerability. This time around most people are focussing more on fiscal deficit and a corollary of that is public debt. Now if you try to save growth, you try to buffet growth by doing higher public investment, then you can actually stoke a government public debt number which has already been on the rise even further. The government's public debt number was about 64% of GDP in 2014, it has risen to about 65.5% currently and may go up to 67% given that nominal GDP growth is not strong and not likely to recover very quickly.

So the government has to be very careful, in order to support growth if it starts spending a lot, running very higher fiscal deficits then the public debt could get stoked and that could compromise on the macro stability outlook of the economy. So it is a very fine line that they are treading and I would say here that I am all for government capex, especially things like rural roads where the private sector does not generally show much interest. But the whole idea is you spend more if you can raise more revenues. At this point there is a lot that the government can do, it can sell its stake and get about 0.35% of GDP from there; it can do more by rationalising food and fertiliser subsidy similar to the way they have done in oil; they can try to get additional tax revenues by removing many concessions even as we await GST. There is a lot that can be done. And the back of the envelope mathematics shows that you can easily get about 0.4 to 0.5% of GDP revenues and once you get that, spend that, that is great but spend only if you can raise more revenue is the point I am trying to make.

India's public debt to GDP ratio has been quite tolerable compared to US and Japan. If you look at the fiscal deficit ratio rather than the absolute amount because the nominal GDP this year will be much lower than was envisaged, your fiscal deficit ratio could look higher than it actually is. So is there a case for looking at the public fiscal deficit after discounting the fact that nominal GDP is that much lower or should one be very rigid about it?

Pranjul Bhandari: Well point taken on both fronts. On the first one, I agree that we are much lower than developed market public debt but remember that we are not compared to the US or to Japan. We are compared to our own cohorts, the other emerging markets whose public debt is much lower than ours. We are in the 65% ballpark and rising up to 67% to 70%. The average of emerging markets is about 40% to 45% of GDP, so that is one thing to look at. Also, debt levels works different for different countries and there are many methods to work this out.

We ourselves looked at about three different methods and we find that the number which is acceptable for India at this point is 65% of GDP. If debt levels rise much higher than 65% of GDP and markets believe that it is not going to come down in the foreseeable future, then some trouble can brew up so. On nominal GDP growth, I completely agree and in some sense that is one of the main reasons why our debt levels are rising, but skipping a fiscal consolidation path year after year can become a rather slippery slope. There is no guarantee that in the next two years nominal GDP will trend much higher than it is trending now.

If we chalk out a path this year and then again next year we have the same problem and we skip our deficit targets again, then we lose a lot of credibility in the markets. With oil at $30, there is never a real better time to actually stick to the fiscal consolidation path and at home government should do more reforms, by which it can actually raise more revenues. There are many ways in which we can do that as I mentioned above. If the markets can feel that we are actually working hard on the revenue front, then we can become one of the most credible economies around the world.