High oil prices will certainly be a risk for India: Taimur Baig, Deutsche Bank

3/04/2011

In an interview with ET Now, Taimur Baig, Chief Economist-India, Deutsche Bank, talks about the budget, fiscal deficit target and rising oil prices, and shares his outlook for the long-term bond yields for India.

What is your reading of the budget 2011-2012? Is the fiscal deficit target of 4.6% achievable or is that a given?

We do not think so. There are several reasons. We do not disagree with the government’s forecast as far as revenue side is concerned. The sort of buoyancy that is expected on corporate tax income or excise or customs seem broadly reasonable to us and we do expect those targets to be achieved without much of an effort from the government’s side.

On the spending side, we have quite a bit of misgiving. Take, for example, the subsidy budget. In a year when we will see world oil prices may be 25-30% higher than last year, the expectation from the government side is that the subsidy bill would actually decline by 25-30%. This in our view is simply not believable because we do not think the government could actually pass through so much in domestic retail price adjustments that the subsidy budget would be achieved. So in our view there is a huge risk of the fuel subsidy in particular - fuel, food, fertiliser, all of those together - that there is a significant chance of those being exceeded than what the expectations are.

Also, on the non-planned spending side in relation to subsidies, the government has planned very conservative numbers as far as economic services and social services spending are concerned. We do not think those are achievable given how much those spending categories were elevated last year. So taking those two issues into account, we think that there is as much as 0.5% of GDP upside risk to the spending side which means that unlike government’s about 4.5% of GDP forecast, we are looking at about 5% of GDP. 


How do you believe FIIs are viewing the budget?

The expectations going to the budget were actually fairly low. Given that the government is looking at a series of state elections this year and there have been a series of governance related challenges to the government, it was not the perfect time for very bold reforms and we did not get any bold reforms. So as far as foreign institutional investors are concerned, there are not any triggers in this budget that would propel them to increase or change their view significantly more positively toward India. But at the end of the day, given that expectations were not very high, the chance of disappointment is also on the low side.

What is your outlook for the long-term bond yields for India? Is there a chance that the government may actually overshoot its net borrowing target?

If one believes our forecast that the deficit would actually be 0.5% points higher as a share of GDP, then the chance of net borrowing being higher than budget is going to be higher. But the government does have a fairly comfortable cash buffer. So they could run down that to finance higher deficit. That could be one way to control the amount of additional borrowing they might need.