Krishnamurthy Subramanian, chief economic adviser, in an interview to CNBC-TV18's Latha Venkatesh says the economic slowdown is due to the uncertainty due to the ongoing poll season.

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I want to start with big slowdown issue, we are already seeing it in a lot of the automobile numbers for the last 6 months but now even fast moving consumer goods (FMCG) guys are complaining. What is the soft patch, what is the origin of this slowdown we saw in the first quarter?

I think what you are highlighting is something that we have to recognize that there has been some slowdown over the last two quarters. To me, I actually attribute a couple of factors to this; one of which is a little bit more structural and something that is a hangover of what has happened earlier and second is something that I expect it to go away. Remember that this is an election season and historically we have always seen that there is some uncertainty around the election developments and therefore there is a wait and watch mode that corporate and other agents in the economy adopt which can be part of the factor here and this would be something that we hope would go away once the election process is over.

Also Read: Economy has slowed down over the last two quarters, says chief economic adviser Krishnamurthy Subramanian

The second part which is a little bit more structural is the fact that and we know very well that gross capital formation in the economy had been slowing down. Now, of course, it has picked up, but if you recognize the fact that the effect of investment on growth is often felt with a lag so the decline in that investment, some of those effects are starting to show up now. If you ask why that happened? Remember that during the heady years capacities build up significantly, capacity utilization now has still not reached an average of about 75 percent. So the demand for investments from corporate is still to pick up and we also had corporate and the banks levered up significantly, over-levered which they are trying to wind down. So this is a process because of which the capital formation in the economy had come down and effects of which we are now seeing.

I take your point about the legacy effect of both non-performing assets (NPAs) and overinvestment, but we got Maruti Suzuki India results and a whole bunch of brokerages are still expecting that FY20 is also going to be slow and why only Maruti analysts, look at the International Monetary Fund (IMF), look at Reserve Bank of India (RBI), even for FY20 the numbers are still being lowered whether you look at micros or macros. What is your estimate? Do you think the slowdown continues FY20 through?

I think that is not unexpected. If you have a couple of quarters where there is some slowdown in growth, the growth projections, given that it is tempered by what or moderated by what, we see over the last couple of quarters, will come down a few bps points. So my own estimate is we should be 7 percent plus. I think I would be very optimistic if I say we will hit 7.5 percent but we should be able to hit 7 percent plus, that is my estimate.

This tends to have an impact on the tax collections as well. What is your best estimate of the FY19 collections? Looks like even direct tax—where we all thought that it would hit the bull’s eye—is down by about Rs 62,000 crore vis-à-vis estimates. Can you give us some colour on what were the tax collections and therefore what is the deficit likely to have been?

If you look at the direct tax collections and we look at the April-February numbers, the tax collection was about Rs 8.35 lakh crore, which is about 15 percent higher than the numbers in the previous year over the same period. Overall, the tax buoyancy on the direct tax side has been above 1.5 because of a 15 percent growth on a 10 percent nominal gross domestic product (GDP) growth approximately of between 1.4 and 1.5. So yes, I think our projections, our estimations may have been a little bit more ambitious but if you look at the real actual numbers, direct tax, I wouldn’t be worried. Tax buoyancy of 1.5 on the direct taxes—now, indirect taxes, yes, I think we have to recognise there. Certainly that even there if we look at the actual estimations about 8.5 lakh crore, which has grown by about 3 percent over the previous same period, April to February. So there has been a shortfall of about Rs 1 lakh crore of the goods and services tax (GST) collection. I think that is something which has pulled us back and we need to be working on that as we go forward.

So my sense is that as we project for the next year, I would be less worried about the direct tax collections but I would put emphasis on the indirect tax collections and some other steps that are being planned. Those would help in bringing back the buoyancy, increasing the buoyancy on the indirect tax collections.

My point was, compared to the budget estimates, which were framed as recently as February 1, the tax collection expectations are 19.5 percent, so we are a distance away from what we budgeted, therefore, what is your best estimate of the previous fiscal deficit but more importantly of the coming year because that is weighing on the market’s mind, that is not allowing RBI’s rate cuts to be passed on even in the bond market?

Remember that in absolute numbers, the fiscal deficit may be a little higher but because the GDP estimates also if you factor that in, I expect that the fiscal deficit number to be around 3.4-3.5 percent, 3.4 percent is a better estimate, around that for this year and the next year, given that our direct tax collections have shown a buoyancy of 1.5 increase about 15 percent, we should be able to make those estimates and if you remember, after the budget, the revenue secretary himself had said that the estimations for the next year are realistic.

Therefore, we should be able to achieve those estimates. So I would stick to the 3.4 percent estimate for the fiscal deficit for the next year as well because some of the uncertainty that I spoke about earlier around the election process – once that gets over and you start seeing more and more action, that should start showing up in the indirect tax collections as well.

Together with some other steps that are being planned, I wouldn’t be at this point in time too worried about. The only thing I would say is that given - maybe our estimations for this year were more ambitious but if you look at actual numbers and how things have moved, on the direct tax side, we are doing fine, in fact, we are doing pretty well.

The market is worried. There have been two rate cuts from the RBI but the yield curve has only steepened, the 10-year is still ruling at about 7.5. What is your sense? Obviously, the worry is that the government is borrowing too much. Do you see yields falling, do you think there is space for more cuts; the cuts are not anyway being very effective. So what is the recipe then?

This is something that we have been looking at. I think some of the worries of the market is also related to the borrowings that are being done through the public sector; what is called public sector borrowing requirement (PSBR) and there it is important to keep in mind that compared to the numbers that were basically the outlays, the actual numbers and I think the numbers are still coming through, the actual borrowings are not as much. I think in this case we are still gathering the information on some of the PSBR.

The worry for the market is that if you look at not only the center but the state government and add the PSBR but here is where I would want to bring to the attention of market participants that the actual borrowings may not be as large as what is being thought about and therefore there may be a reason for less concern on that front and also one of the other concerns that the private sector has had or market have had is, if you look at the Central Statistical Organisation (CSO) numbers up until 2017-18, the savings rate has been coming down and then the concern was will there be enough room for the private sector to be able to borrow when the investment cycle picks up.

I think here is where the numbers start coming in, I think the savings rate and of course we have to wait for the final numbers to come in, but even the savings rate may not be as bad as we have thought about and the room for the private sector may not be as crushed as some market participants are worried about. So overall my sense is that there is scope for the term premium which is the long run versus the 10-year minus let’s say, the short run for that to come down once the information comes through on this.

You gave away the hint yourself, public sector companies are doing much of the government’s borrowing, the Food Corporation of India (FCI) has borrowing number of Rs 1.96 lakh crore; unprecedented numbers.

Not much of.

Rs 1.96 lakh crore is not unprecedented?

This is where I was saying that compared to the outlays the actual number may be lower and that is the point. These are the outlay numbers and that is the point I am trying to make that eventually the yield curve has to shift based on what is the actual numbers, not as much on the outlay.

If you were to ask/want something from the RBI, what would you want from them for the yield curve to soften and the steepness to go?

My stance on this is that we have a very good set of professionals; the RBI is a much-esteemed institution, they know their job and it is not for me to tell them what they should be doing.

Would you want them to have more liquidity in the system that was what I was wanting to know from you?

I think those are conversations we would like to have with them directly.

What about fragility in the debt market, is the government worried that there might be an accident?

Here as well, if you look at the overall debt market, the debt markets react to the extent of what is the fiscal prudence. If you look at that overall path compared to where we were at about 5.6 percent, now we have securely come down, we have kept coming down and we are following the glide path towards fiscal prudence. So compared to possibly for instance, the years of taper tantrum, even our current account deficit (CAD) is much lower. So, overall I don’t think we should have a concern on that front.

One more aspect which I think in the coming year, we should expect more inflows, in fact emerging markets are seeing more inflows coming in which also sort of allay these concerns.

I wasn’t referring to the macro government borrowing. I am asking you whether government is worried there will be an accident in the NBFCs space and hence in the debt market?

I think what happened with IL&FS, the government moved in quickly and firewalls have been created there. So I am quite okay with the way we are right now and as I was saying earlier, the overall debt markets actually look at the environment for fiscal prudence and overall current account deficit etc. So I think the NBFC situation is better than what it was at the time when the IL&FS crisis had happened, it has been contained.

Overall, why we certainly cannot take our eye of the ball here, we are not in as much of concern as we were possibly a few months back.

Day before yesterday there was a rating downgrade that came for Reliance Capital and on the same day Credit Suisse wrote a report worrying about 3-4 stressed assets in the NBFC space and whether that can create problems for AMCs and therefore for the debt market itself. I just wanted to know if the government is exercised on that issue.

Obviously, the government is clearly aware and is seized of this matter. There are some NBFCs which are facing some difficulties, which is something we are monitoring very carefully and we will take the steps as and when required.

I just wanted to know what we should expect from your maiden economic survey, let us talk about rural - surely you will have to do something about this transfer of income. No matter who comes to power, there has been a transfer of income that has been promised in the manifesto, so what should we expect from your survey?

Let me at this point because the themes for the survey are evolving, I would comment on the specific scheme that you asked about- the PM Kisan Scheme. My take as an economist, I have two points to consider here – one is that Rs 6,000 is if you take the average income of someone who is small or marginal farmer with less than 2.5 hectares, there are various sources of data, on average the income from farming is about Rs 30,000 and so Rs 6,000 is 20 percent increase on that, so that is on the return part.

But what is more critical and I focus on as an economist is a risk-return tradeoff, how it changes because this is an assured source of income. Remember, agriculture is one area which is infested with a lot of risks –risks on production, risks on yield, risks on prices what you would get etc.

So we have done some estimation and looked at how the risk profile actually changes significantly because now the farmer can expect Rs 2,000 every four months. For instance, what is called the coefficient of variation, which is how variable the prices are, in some crops, for instance, can be as much as 30 times the mean, which then means the farmer is exposed to significant risks.

So from an economic point of view as well there is some value from the assured income. Remember, this is like equity payoff, which could also be used by microfinance companies and self-help groups (SHGs) to actually give loans, which sort of eases liquidity situation for farmers as well.

Overall, this is something which has economic merits to it.

First Published:Apr 26, 2019 12:50 PM IST