Finance Minister Pranab Mukherjee on Saturday tabled the economic survey for the fiscal year 2011 in Parliament.
The survey is optimistic on growth with a forecast of 8.75 per cent to 9.25 per cent growth in FY12. The survey projects the FY11 fiscal deficit at 4.8 per cent on a higher GDP base. However, inflation continues to be the key concern for the nation. The survey warned that inflation would be at elevated levels due to the West Asia crisis and demand pressures.
Speaking to CNBC-TV18 earlier today, Kaushik Basu, Chief Economic Advisor said, "The crude shock can be one severe downside to the projected 9 per cent plus growth. We can handle the crude shocks at its current levels. If the shock goes deeper, we will begin to have difficulties which will be more than inflation."
"Beyond a point, our factories and various operations working on oil will begin to hit. This will be a downward shock on India's growth. If this happens, it will be a global shock and a slow down on growth", he added.
Basu also clarified that the government would step in to soften the blow of runway crude prices.
On the issue of teaser loans, the survey said that banks should be encouraged to introduce these products. This is in sharp contrast to the RBI, which has warned against these products. The survey adds that teaser loans in India were not given to sub-prime borrowers, like in the US, and have actually enabled new home buyers to enter this market. The survey is emphatic on the point that restrictions on these loans should be minimal.
However, ICICI Bank's MD & CEO Chanda Kochhar downplays this stance. She said, "The other concern which the RBI has been pointing out is a different concern altogether. To say that over a period of 2 years or 3 years the interest rate on these loans will go up and therefore what will be the ability of the customer to pay the higher interest rates after a couple of years and the second is has the customer understood very clearly that the interest rate will go up. So I think these are two very distinct points. I think clarifying that these are not equal to sub-prime loans is in no way negating the other point."
In an exclusive interview with CNBC-TV18, TCA Anant, Chief Statistician of India, Chanda Kochhar from ICICI Bank and Hari Bhartia, President of CII, discuss the highlights of the economic survey.
Here is the verbatim transcript of the interview.
CNBC-TV18: The survey says that the Indian economy is expected to grow between 8.75 per cent to 9.25 per cent in FY12. There are several downside risks to this figure. What is your own assessment of the state of the economy? Do you think this is an optimistic target? Or do you think this is a target that can actually be achieved?
Anant: I don’t make projections on what the likely growth is going to be. Projections made in the economic survey are consistent with Prime Ministers’ Economic Advisory Council’s estimate for GDP growth in the coming year.
The report has identified both, reasons for making the projection as well as risk factors on the projection. They seem to have done their homework right. Any forecast is just an estimate, so one should take it as being reasonable.
CNBC-TV18: What is your point of view on these estimates? We have had several comments coming in through the day. A lot of people seem to suggest that, if you are on the path of fiscal consolidation, you are battling high inflation. It doesn’t sit when you then talk about a growth rate of between 8.75 per cent and 9.25 per cent?
Kochhar: These growth projections are reasonably achievable. As the economic survey points out, there are certain unknown risks. It all depends on how these unknown risks pan out. Even today, the underlying factors are still continuing to remain strong.
Consumption is still strong and the investment pipeline is still going on. As long as these two factors keep going on, the economy has a momentum to keep moving at these rates. All we need to look at are the crude prices and inflation in general.
CNBC-TV18: FM said that he is worried about inflation and his concern on generalised inflation and inflation affecting the core sector. We have seen banks like yours hiking rate 24 hours ago. He also spoke about the need for monetary action, which is warranted. Where do you really anticipate the rate cycle? We have these external shocks that are needed to deal specially with the crisis in West Asia.
Kochhar: When we talk of rates, we should look at three different kinds of rates – the monetary policy rates which are announced in the policy, the long term rates which get indicated by the Gsec Bond rates and the bank deposit and lending rates which are currently moving in terms of the short term rates in the market.
We would still see some more rate hike in the monetary policy terms, as they are yet back at the pre crisis level, whereas, the growth is back. In the next coming years, we will see more hike on the monetary policy rate. As far as the bank lending and borrowing rates are concerned, the borrowing rates or CD rates have peaked quite a bit.
There is still some scope for lending rates to go up as they go up with a lag. There is still some amount of upward bias in the lending rates. A lot would depend on what happens to the liquidity situation and whether the government spending really remains strong or comes back strongly, during the months of March.
CNBC-TV18: Will the lending rates go higher from hereon? What is CII’s estimate? Will you see the economy growing at these rates?
Bhartia: The agriculture growth is expected around 5% which is a good news as it will add to growth. Exports are also going up. Last year, we expected the capacity building private sector investment to be about 13.5 per cent to 14 per cent of GDP, which was higher than around 11%. It is picking up as it had gone as high as 17 per cent at one time.
The credit off take sure is better, but the high interest rate is a concern on sustaining large amounts of private investment. At some point, if the interest rates continue to go up, it will certainly be a roadblock to further investment. As of now, the demand is so high and the capacity is being built, so the impact of that will show in the next year. We estimate the growth rate to be reasonably between 8.5-9 per cent.
CNBC-TV18: CII has spoken about how there should be a gradual withdrawal of the fiscal stimulus. This has been your representation to the Finance Minister as well. The view from Kaushik Basu is that it should not be stopped at one shot. Is that music to your ears?
Bhartia: Absolutely. There is also increase in oil prices, so we have to be careful. There should be a gradual withdrawal, because a sudden withdrawal will affect and people will pass on higher excise duty to the consumer.
CNBC-TV18: Do you expect the rollback that people were anticipating on the excise front, or do you think it will stay where it is?
Bhartia: I hope it will stay where it is. In the GST, we had estimated the service tax and excise duty to remain at 10%. There is no need to bring it to 12 per cent or 14 per cent and then roll it back. The idea would be to expand the tax base, make it more efficient and then raise more funds through that.
There is a lot of leakage in the system. We have asked to introduce technology and I hope he will as the inflation is quite high and oil prices will be a problem and why add to the problems. We can wait for another year.
CNBC-TV18: The survey very clearly talks that inflation is a biggest risk to growth. It may stay elevated on the back of the West Asia crisis and is now beginning to be generalised. What is your own assessment on the survey?
Anant: The inflation is not generalised as on the non-food front, inflation is still not very high. It is higher than last year, but not been at the level at which one should be concerned. WPI inflation has remained high overall for a variety of reasons. On account of food, inflation grew over the last year which is an area of concern. Crude prices have shown signs of hardening and have recently shown very sharp surges. The crude prices will have a substantial effect on our budget deficit in the coming year. Since they beat into a number of our key inputs, some of which are imported, they will have a general effect on our costs over the year. On both these grounds, inflation and oil price situation continues to be a source of major worry. Both of these can be major dampener in the emerging group picture.
CNBC-TV18: The survey speaks specifically about banking. One of which was teaser loans. In complete variance to the Reserve Bank on the teaser loans, the survey very clearly said that teaser loans enabled many home buyers to enter in the market and speaks well of the inclusiveness of this game. Subprime borrowers were kept out of the game and teaser loans enabled India’s mortgage market to remain stable. As a bank, how do you react to what Kaushik Basu had to say in terms of teaser loans?
Kochhar: No. There is a very important statement made here, which is an important clarification. These teaser loans were in no way equal to subprime loans. Subprime loans are those where you give a loan to a customer without any backing of a cash flow. You give a loan to a customer because he owns a property whose value keeps going up.
Whereas, in our case, in India loans have been given on the backs of a cash flow and were given to a person who had an income to pay the EMIs. In these loans, the EMI started from year one. It was just that, for the second or third year, the interest rates were lowered than the interest rates prevailing later.
This is a big and valid distinction. Therefore, the point is that these loans are given at the back of an identifiable cash flow and are nowhere close to subprime loan.
CNBC-TV18: Do you think that the Finance Ministry is nudging the Reserve Bank in a gentle way on the issue of teaser loans?
Kochhar: No. RBI has been pointing out is a different concern altogether. Over a period of two or three years, the interest rate on these loans will go up. Therefore, will be the customer be able to pay the higher interest rates after a couple of years and whether the customer has understood that the interest will go up. These are two very distinct points. Having a more transparent communication with the customers is very important.
CNBC-TV18: The survey said for banking licenses that business houses may be allowed full banking licenses. They may mull separate licenses for basic and full banking. MFIs and MBFCs should be given basic banking licenses. What are your thoughts on what the survey had to say?
Kochhar: After the survey, we heard Mr Kaushik Basu say that this is a starting point of discussion in the survey and along with RBI they would finalise the guidelines on the banking licenses. Competition is always welcome and the customer always gets the best when competition goes up.
When we frame guidelines, the policy maker and regulators will keep in mind to take into account the governance principles. This will be the most important factor. It is not the question of which segment gets the licenses but a question of governance principles framed, monitored and followed.
That is where we will have to keep an eye that fundability of money and conflicts of interests, both in shareholding pattern and lending practices will have to be taken care of.
CNBC-TV18: On the back of what you heard in the economic survey, do you think it will be a pro-growth budget and anti-inflation budget?
Bharti: No. Pranab Mukherjee is always for pro-growth budget. There have been enough statements made about that growth is important. On Friday Prime Minister said that if we have to continue to spend in the social sector, then growth will be important.
The survey very nicely states about subsidies. They said to target the subsidies. They said higher education that let us make it a private social public partnership, which is a good move. For primary and secondary education, they said why cant coupons be given.
If you involve private sector in a vast investment in an efficient manner, you will be able to deliver the results. We will have to increase enrollment in the higher education from 12-30 per cent by 2020. They have given a very good direction.
CNBC-TV18: Do you expect this to be carry forward to the budget?
Bharti: I hope so as they had said it last year also.
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