Financial Daily from THE HINDU group of publications
Wednesday, Oct 13, 2004
Industry & Economy
`Govt expenses far more rigid than revenues'
Chennai , Oct. 12
MR Subir Gokarn, Chief Economist of Crisil, the country's leading rating agency, heads its Centre for Economic research in Delhi.
He was earlier associated with the National Council for Applied Economic Research and the Indira Gandhi Institute of Development Research. Mr Gokarn is also a widely read columnist and a reviewer of books.
Excerpts from an interview in Chennai recently:
What are your views on how the economy is faring now?
The fiscal situation is sensitive to two factors. Firstly, the extent of food and fertiliser subsidies that is a big part of the expenditure side. And if agriculture booms, there will be an increase in subsidy commitments. This year, we have had a depressed agricultural scenario. That is a saving grace as far as subsidy is concerned - not a nice way to cut expenditure - but it works.
On the revenue side, industry has been doing well. So tax collections (indirect) are on track. There is no major slippage. When we analysed the Budget, we thought the revenue estimates were overly optimistic. But realistically speaking, industry is growing at 7 per cent, and that means excise duty will grow at 7 per cent plus.
Inflation is at around 5-6 per cent, imports are increasing, so profitability is an issue.
When the second quarter numbers come in, we'll see the impact of oil prices. The margins will start to come down. So that means corporate tax collections may be subdued but not dramatically lower. Margins are still increasing as a result of productivity gain.
Crisil's analysis of the Budget had indicated that you expected Government borrowings to go up by about Rs 20,000 crore?
That was a qualified statement. It was made on the presumption that expenditure would be as budgeted. But a new Government has assumed office in the middle of the year and many of their commitments will get postponed. It is difficult to say how much of slippage there would be on expenditure. We made an analysis of expenditure patterns over the last couple of years. The mix of actual expenditure tends to be different from what is budgeted but the aggregate tends to be fairly close. Expenditure is far more rigid than revenues. Things may be different this time. We have said that the deficit would be 5 per cent of GDP but will take a relook in end October/November and we could come up with different numbers.
There are of course the Fiscal Responsibility and Budget Management numbers - so the Government will have to find a way to meet the target or a good reason not to. Oil is probably a reason not to meet the target - It's an external threat.
Government borrowing compared to the previous year has been lower so far. What are the implications for interest rates?
We have found that there is a fairly wide range of variations with regard to Government borrowing that the market seems to discount at the beginning. So unless the slippage is significantly outside the range, interest rate doesn't seem to respond. There are other drivers - demand for credit is going up very significantly. And because of inflation, RBI cannot accommodate this through easing of liquidity. So a tightening of demand is obviously contributing to rising rates. Banks are obviously unfolding G-Sec portfolio to move towards lending. We think the 10-year G-Sec yield will be at around 6.5 per cent at the end of March 2005.
What are your views on inflation?
We think it won't persist very long at these levels. The base effect should begin to show from now onwards. It should go below 7 per cent in the next month or so. But oil is an unanswered question. The assumption we made was the oil would not rise dramatically from the $40 per barrel levels but it has done just that. We aren't able to predict how long this latest spike is going to persist. That's the big uncertainty both on the global and domestic scenario.
We are now in a logical path of a business cycle. Alongwith rapid growth, you can expect higher inflation and higher interest. These are all concomitant to a business cycle. It has been clouded to some extent by oil prices. The inflation that we see now is essentially supply side and not demand driven. It is imported inflation. We have no control over it. We have the buffer - the forex reserves. We can dampen it, mitigate its shock impact on the economy, but we can't control it.
Which sectors are picking up bank credit?
I can't answer that in narrow detail. But the shift is clearly away from retail to wholesale. Retail is growing because penetration has still not reached saturation levels. Wholesale commercial credit is growing because business volumes are growing, and industry has done so for about two years now without a break. So internal resources/ cash are getting stretched and the reliance on external source of funds like bank credit is increasing. For most players, who have expansion and streamlining plans, it is easy to go for bank credit. Banks are also more flexible and willing to lend for short term.
Is the industry growth that we have seen so far sustainable in the medium term?
I believe it is sustainable. Low interest rates have been critical. We expect retail rates, which have been among the biggest factor in recovery to go up by 60 basis points on the average. That is not very dramatic. Car loan tenors have increased substantially. As for housing loans, no one borrows for the full term. Most prepay it.
Moving from retail and roads that were the biggest drivers in the last year, we see capital spending go up. There is increasing contribution from machinery to industrial growth. The more drivers that we have, the sustainability is easier to depend on.
How would you assess the performance of the manufacturing sector till March 2004?
We have seen very significant productivity gains in the manufacturing sector. If you see how aggregate picture of employment has behaved over the last few years, it was flat, and then went down and it has bottomed out. Basically, we are getting the same or better output with a smaller workforce.
That's clearly an indication that productivity has improved. Some labour that was idle before has been displaced. That by itself is an improvement. But there has also been assimilation of information technology, scale economies and simple belt tightening. And improvement in working capital usage has been phenomenal. Which is why, despite the interest rates going down, there was no demand for bank credit.
It is only now, when we have reached the end of our internal resources, that we see a demand for credit. There has been a lag - an 18-month lag in this case. This is a remarkable reversal from the traditional way that looks at both these things as a sort of coincidental variable. All of these point to various dimensions of productivity gains.
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