‘A pleasantly surprising Budget’

Finance Minister Arun Jaitley walked the talk on fiscal deficit, sticking to the FRBM target of 3.5 per cent for FY17. With the ball now in RBI’s court, will Governor Raghuram Rajan take the Centre’s cue and cut rates? Bloomberg TV India caught up with JP Morgan Head of Emerging Asia Economics Jahangir Aziz.

Looking beyond the Budget, we are ready for a rate cut from the RBI. Is it going to come?

My guess is that the rate cut is on and it is a question of timing. He (RBI Governor Raghuram Rajan) had spoken about it in the last review and said future rate cuts or future direction of monetary policy would depend crucially — among other factors — on how strong or how good the quality of the fiscal consolidation is. We will worry about it nine months from now, on the details. But on the face of it, I think this is a pleasantly surprising Budget in the sense that it sticks to the 3.5 per cent fiscal deficit target, which many in the market had feared the government would violate for the second time in a row.

I would think the RBI would probably deliver a rate cut. How much and when is the question. But my sense is it would be pretty soon.

A roadmap that the Centre is working with right now is also dependent on how and where oil prices are likely to head. What is your opinion on that?

In the last two-three weeks, we have seen very high volatility in the oil market, reflecting a bunch of factors including the OPEC trying to cut back on supplies or at least rumoured to cut back on supplies.

But my sense is that the Budget is likely to have assumed crude oil price averaging $40 per barrel though it does not explicitly mention it. It is hard to see oil price going beyond that for 2016. You will have to remember that OPEC is just one third of the total world’s supply. If it does anything to push the oil prices above $40 a barrel you will get a very large supply response coming from shale gas in the US and Europe.

Shale gas can very quickly and rapidly turn around and deliver the supply response as it does not take an enormous amount of new investment.

As long as there is shale gas capacity, which is a lot, I think the upside to oil prices is limited unless of course we see a very miraculous recovery in global growth.

The fiscal deficit target of 3.5 per cent is again coming with some tedious calculations — the Pay Commission payouts and a record-high rural allocation. Are you not worried about inflation rising again?

There are lots of problems in the Budget. If you look at the amount of dividends it has projected from PSUs this year, clearly the spectrum sales and the divestment programme are very large at the same time.

I can’t find it but if you look deep enough you will probably get three quarters of the increase in the Budget somewhere. All of those things are a problem that we will face and we originally face in every Budget.

But this Budget did not go and say tax revenues is going to grow 19 per cent because we are expecting nominal GDP growth to be 15 per cent. Had the government said we can’t manage this and given the deficit target of 3.7 per cent, which the market was expecting, we would be in a completely different state. So yes, there are uncertainties. But at least the government is saying that it intends to keep the deficit at 3.5 per cent and not do what it did last year because that would have eroded its credibility.