Budget 2012: Government needs to take measures to reduce fiscal deficit, says Louis Kuijs, Fung Institute

In an intewrview with ET Now, Louis Kuijs, Project Director, Fung Institute, talks about the budget and shares his outlook for economic growth. Excerpts:


ET Now: What are your expectations from the upcoming Union Budget in India?

Louis Kuijs: At the moment, Indian fiscal is a little bit tricky because we have seen a lot of pressure on the fiscal policy by way of demands for increased subsidies and other increased expenditure items. It is important for the government to maintain microeconomic stability and India’s fiscal policy has always been an element that complicates macro stability especially at times when the external deficits are rising.

So, it will be very important and the government knows that it will be very important for it to deliver a budget for the next fiscal year that will show some decline in the fiscal deficit.

ET Now: How are you viewing liquidity flows into India and how do you believe that is going to impact the markets here?

Louis Kuijs: Last year, we saw that India suffered from a general risk aversion that was taking place globally. So, in that sense, India is the typical emerging market country. There is an underlying growth story, but the markets in all fundamentals are not yet as sound as they should be. As global risk sentiment was improving, we saw flows back into India.

So, in that sense, it will continue to depend on whether India is able to deliver the kind of macro stability and of course combined with that underlying growth story that will convince people to put their money into India either in assets or in fixed income instruments.

ET Now: You mentioned an underlying growth story for India. So, in light of this, which are the sectors that are attractive to you?

Louis Kuijs: It is hard to say which sectors in particular. It is very much a general story. We have seen over the last 10 years that domestic demand has been a key driver for demand in general. The Indian policymakers and also Indian business are really keen to make more progress on the manufacturing sector and the export-oriented manufacturing sector.

So, there will be opportunities in both sides of that picture, both the domestic demand picture and urbanisation and whatever that means in terms of the companies that are operating in that part of the economy, but also these possibilities start to occur on the export-oriented manufacturing.

ET Now: Also, India’s 3rd quarter GDP came in at 6.1% yesterday. What is your outlook for economic growth for the country going forward?

Louis Kuijs: This fiscal, we will probably see something like 6.5% growth. At the moment, the Indian growth cycle is probably at its weak because of domestic monetary tightening that has taken place.

Now, that the inflation picture starts to improve and we are expecting the RBI to ease monetary policy, it should be possible for the domestic growth cycle to start moving again. Therefore, I would expect growth in the next fiscal year to be a little better than it was in the current fiscal year.

ET Now: What are your expectations with respect to what the RBI is likely to do in its quarterly review in March? Do you believe that there will be a further CRR cut?

Louis Kuijs: The data that we saw in January was very good and encouraging. I would expect inflation to continue to be on the downward trend and provide the room for RBI to ease monetary policy in a decisive way.

ET Now: What are the risks according to you to fund flows into emerging markets in Asia? Do you think high oil prices could derail market sentiment?

Louis Kuijs: In general, the fund flows into Asia are very much a story. They are part of that story of global risk sentiment improving, global liquidity also improving and of course Asia is the one part of the global economy that is growing, that is relatively stable.

So, there is a lot of interest of capital to move into Asia. There are risks out there and if oil prices go up because of supply side reasons, because of unrest in the Middle East and those types of factors that are going to constrain supply, then that will be a problem for the global economy because this is going to be bad for growth and bad for inflation at the same time.