Answering a query on what he expected from the new finance minister, Arun Jaitley's upcoming Union Budget Richard Iley, Chief Asia Economist at BNP Paribas said it is important that the finance minister keeps the deficit reduction programme on path.
"What is absolutely critical for me is the new finance minister credibly commits to keeping the last administration's deficit reduction path on track," said Iley in an interview to CNBC-TV18.
Also read: Will present a good not just a populist Budget: Sitharaman
Below is the transcript of Richard Iley's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.
Ekta: A lot of the dynamics for the Indian macros have changed recently, this is with Brent crude prices rising and being uncertain in terms of a trajectory going forward and along with the fact that we might even be suffering from deficient monsoon this time around, do you think that inflation targets of around 8 percent by January 2014 might now be under risk?
A: I think there are some upside risk to inflation. I think most of it being worried about food prices and the risk of a deficient monsoon pushing food inflation back up towards the end of the year certainly back up into double digit territory, he is rightly said that the threat of higher oil prices is now another upside inflation risk that we can have to the worry list. So I think the inflation numbers that we will get over the very next couple of months will be pretty benign due to base effects. I think consumer price index (CPI) inflation is only certainly going to fall below 8 percent in the next couple of months but I think the risk is that later in the year on the back of maybe worse than expected monsoon, those higher oil prices we could be back up above 8 percent. Governor Rajan critically has indicated that he will look through base effects. So the RBI is going to be very alert to the signs of higher food and energy inflation that may be coming through.
Anuj: What is your call on the Indian rupee which has seen quite a bit of volatility over last three or four days. Of course there are some global factors as well but at 60 how are you positioned on the Indian currency?
A: It seems about fair value to me when you look at estimates of the real exchange rates. The rupee was clearly overvalued before last year's taper tantrum when we fell back to a much more appropriate level versus the dollar and on a broader real effective basis.
What is critical are going to be two factors; the external environment and in particular this very artificial environment have extremely damped volatility and quite swollen risk appetite continues and also what we get from the new administration and for me in terms of the reform process in terms of continuing the optimistic spirit the foreign investors are viewing in the year through next month's budget is really going to be the key litmus test.
Ekta: What is your expectation from the budget next month and do you think to adhere to the 4.1 percent target for fiscal deficit and because of the risk of rising crude prices growth might also be on the back foot for FY15 as well?
A: It has got a certain amount of sympathy. Finance minister Jaitley is already on the back foot given the extent to which subsidy spending from fiscal 14 has been pushed in to this year by the last administration. In terms of the broad themes what is absolutely critical for me is the new finance minister credibly commits to keeping the last administration's deficit reduction path on track. So as you say that 4.1 percent Gross domestic product (GDP) deficit target is critical that that is credibly committed to and that there are plausible measures designed to reach that.
In particular subsidy control we are hearing news that fertiliser subsidies could be cut, action on diesel subsidies as well. Those would be very welcome measures for me to rain in subsidy spending. Moving on the tax base as well a credible commitment to finally getting the Goods and Service Tax (GST) in place would be very important. So that fiscal arithmetic is vital committing credibly for the 4.1 percent deficit target but I would also want to see more from the new administration in the budget. Action on foreign direct investment (FDI) liberalisation which again has been lots of chatter about concrete measures announced on that with liberalisation in various sectors would be very positive for me. If we get all of that I would be positive on the rupee.
Ekta: If in case brent rises to say USD120/bbl or maybe even surpasses all time highs how much of the macros change for India and would you change a couple of your parameters that you would be looking at and which would be the current parameters that you would have to rework for India immediately, would it be a GDP target as well?
A: Yeah, higher oil prices are clearly a negative supply shock as these economists like to call them. They are growth destructive, they push down economic growth and they push up inflation. A base case barring much higher oil prices is for the GDP growth to pick up to somewhere around five and quarter to five and half percent for fiscal 15 just pretty poor performance for the Indian economy really is all about growth expectations for 2016 and beyond and that is why this year's budget is so important in helping cement those and taking some of the tough decisions that are needed to reinvigorate India's macro dynamics out over the medium term action on infrastructure action and on food supply action decisive action to really bring down the deficit at least in line with the last administration's target ideally even faster and critically providing support for Reserve Bank of India (RBI) in its fight against inflation and eventually opening up space for the central bank to potentially cut interest rates at some point over the next year.
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