Ashhish Vaidya, head of trading and asset liability management, DBS Bank India, in an interview with CNBC-TV18 on Friday talked various measures that the government should take to boost demand in the economy.
According to Vaidya, the main motive of Union Budget 2020 is to kick-start consumption, especially in the rural markets. Here are the edited excerpts from the interview:
What reforms are you expecting from the government in Union Budget 2020-21?
A: We are looking at key parameters this time and not really expecting anything specific from the Budget. FRBM (Fiscal responsibility and budget management) is something we are looking into, and if the road map for FRBM is revised this time. Debt management is another parameter that should be watched out for. Any statement of intent that affects the borrowing programme is important. Broadly, the market’s borrowing is roughly between 67-72 percent of the total fiscal deficit. Now, whether they will be sticking to this range or going higher or vice-versa is a key indicator that we are looking into. However, the main motive of the Budget this time is to kick-start consumption, especially in the rural markets.
According to some market experts and analysts, there will be no announcements on the personal income tax. What do you think?
A: I agree with you. I doubt anything will come up on the personal income tax cut front. The problem is that we are facing headwinds in terms of growth, gross domestic product (GDP) is falling and there is a lack of demand. The bigger picture to look at is whether the government is willing to bite the bullet, incentivise investment and consumption activity or directly invest in certain sectors.
I am not a believer that the slowdown is completely on account of demonetisation or GST. It’s a combination of a lot of factors including some local factors, as well as, global. Now, we have to figure out what will the government do to make this vicious cycle slow down and that’s the reason I believe there could be incentives coming in sectors like housing and automobile to fix up the demand crisis.
Will RBI's Monetary Policy Committee (MPC) continue to maintain the accommodative stance?
A: The MPC is on accommodative stance because GDP is fragile and declining dramatically. Clearly, the inflation risk has edged up in terms of food inflation, which has now started to trickle down into the core inflation. The food cycle across the world is escalating so there are possible risks on the inflation side.
Meanwhile, the system liquidity in the banking system is fairly good, and that’s because the government wanted to make sure that enough credit is available to the MSME as well as NBFCs space so that the liquidity is not a cause of the slowdown. I think they have kept the systems very flushed. I think we should be heading towards removing the accommodative stance, but don’t think anything immediately is going to happen because we are really in a massive GDP slowdown phase.
Which is the first problem area, according to you, should the government focus at- liquidity crunch, demand slowdown, fiscal deficit or rising inflation?
A: I don’t think there is really one particular area which the government should target first because economics is a little wider subject and a couple of variables are dependent on each other.
Broadly, I would say that it is important that a large set of reforms happen more from a point of view of generating consumption and investment demand. The government should spend more on specific sectors and provide money in the hands of individuals. In fact, liquidity is not an issue but the availability of credit is.
The banks' lending process is much stricter than what they used to lend earlier. What do the banks require really to lend, is liquidity a problem or is it the governance? According to me, I think governance is facing an issue.
If governance of mid-corporates gets a little more disciplined then the banks will have the confidence to lend on the MSME credit.
Also, the liquidity in the banking system currently is to the tune of Rs 3,00,000 crore, which the government has done rightfully because you need to be sure that lack of liquidity doesn’t result in a credit contraction.
According to PTI sources, the government is looking into cutting import duty on fertilizers. Do you believe that the government should also address problems in the case of niche sectors?
A: To my mind, the bandwidth of adjusting the problems will be taken away by the large employment sector. I think that is something which is urgent and important from a consumption and investment cycle point of view, from an overall growth perspective.
While I agree with you, there are so many other niche sectors that require attention just so that they do not lose momentum, but I think it is like the 80:20 rule. The government is going to look one at a time, which is going to make a huge impact.
Also, let us not look at the Budget from a Budget point of view, it is nothing but a projected statement of intent and statement of account. Does it really preclude the government from taking corrective actions in niche areas? Not really, I do not think that is an issue. I think we have just made too much out of the Budget.
Will Infrastructure take away all the limelight this Budget?
A: I do not think any infrastructure announcement is really an issue. I think the intention of the government has been to grow infrastructure. What we have to see is how the government funds this and how will it execute it.
So, with the execution of the project, it will start feeding itself into more confidence and projects which will kick start the momentum back on track.
First Published: Jan 31, 2020 3:18 PM IST
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