Column : Over to RBI

Written by Surjit S Bhalla | Updated: Mar 9 2013, 06:31am hrs
Indias progress in 2013-14 is contingent on food inflation declining, and RBI being aggressive in its rate cuts

The Budget 2013-14 presentation is over. Dissecting the details, it is the growth assumptions that leave one gasping. Everything has to turn out to be more than just right in order for nominal GDP growth to be 13.4%. Regarding expenditure details, the finance minister could have done more, a lot more. In both his 1997 Budget and his 2004-5 Budget, Mr Chidambaram delivered with innovation, and reform. Budget 2013-2014 was the work of a tired FM; perhaps he is fighting too many battles within his party.

Just as many had feared, this was an election year Budget; enough populism to satisfy the many Chavezes within the Congress leadership, and enough pragmatism to keep the rating agencies at baybut only for the moment. As many commentators have stated, PC will deliver on the expenditure side by reining in the ministries before the fiscal year is complete in March 2014. But a nagging question remainswill he be allowed to do so by the Chavezes just days before the Election

The big Budget numbers are the followingGDP nominal growth of 13.4%, expenditure growth of 16.4%, and tax revenue growth of 19.1%. Add other receipts growth of 132%, and you achieve the magic number of the fiscal deficit being 4.8% of GDP in 2013-14. The most important number in this galaxy is nominal GDP growth of 13.4%. How realistic

Nominal GDP growth is the sum of inflation (as measured by the GDP deflator) and growth. Unfortunately, and doubly so In a Country Like India (ICLI, rhymes with idli) with faulty statistics and faultier interpretations, there are two estimates of GDP availableat market prices, the convention in most of the world, and factor cost prices, almost unique to ICLI. With twin estimates, you get twin everythinggrowth, inflation, etc. One approach is to take just one estimate, but that is not quite kosher. For 2012-13, the Economic Survey does a mixtureit takes nominal GDP growth in market prices (11.7%) and real GDP growth at factor cost (5 %). The difference between the two yields inflation of 6.7 % for the year.

There is an alternative approachtake the average growth, and average inflation, of the twin estimates. Remember, our main objective is to estimate what nominal growth is likely to be in 2013-14 and taking the averages should eliminate most of the data noise in the system. Unless otherwise mentioned, all estimates below will refer to the average estimates.

First, let us examine the data for the year just finishing, 2012-13. There are several important conclusions that follow. First, that the controversial GDP growth estimate of 5% (factor cost) for FY2012-13 is likely to be missed, but not by much. Seasonally adjusted GDP data does show an acceleration, and indicates that the economy bottomed out in the second quarter. Blufins proprietary confidence index, as well as its Business Cycle Indicator, also support the conclusion derived from the GDP data. So while scepticism abounds, the Manmohan Singh government is not wrong when it states that the economy has bottomed, and is improving (parenthetically, I also fully support the UPA conclusion that potential GDP growth in India is above 8%, a conclusion at variance with many experts including the IMFbut that is a subject best left for later).

Now to the more interesting estimates for inflation. No matter what time-period is chosen (3, 6, 9 or 12 months) inflation has fallen towards the low 7% range. And inflation is likely to fall towards the 5% level over the next 12 months. There are several reasons for this (likely) occurrence. Most importantly, the rate of inflation of food prices should stabilise at around 6%, a large 4 percentage point decline from present levels. Note that despite food inflation averaging above 10% for the last several years, the GDP deflator has moved lower by more than 2 percentage points from the peak of 9.7% in 2010.

So, a reasonable estimate of inflation in 2013-14 is 5.5 %; with luck and a sensible UPA and sensible RBI (see below for both), Indian growth should exceed 7 % in January-March 2014, and average 6.5 % for the year. This would yield nominal GDP growth about 1.5% less than that budgeted.

The key decision awaiting India was not from the Budget just announced, and not even from the RBI decision on March 18. Rather, it is the announcement next month by Manmohan Singh on the procurement price of rice. Technically, this decision is made by the head of the Commission for Agricultural Costs and Prices, Mr Ashok Gulati, but even he recognises that the decision is not at all his. Before the advent of Soniaism circa 2006, this used to be a technocratic decision. Since 2006 and full bloom Soniaism, the procurement price of rice has increased at an average rate of 13.6% per annum, and that of wheat by 10%. This sequence of irresponsible price increases has not got the Congress any votesindeed they have lost votes because of inflation spiralling upwards, and growth spiralling downwards.

Thankfully, it now appears that Soniaism has realised its limitations. In October, wheat prices were raised by only 5%, and next month, the paddy procurement price increase should be less than 5%. And given the extra-large inducements given to rice, parity with wheat can be achieved by announcing a zero price increase for rice (procurement prices do not decline in India). Assume this were to happen, though with Soniaism one is never quite sure. This would mean a more than 4 percentage point decline in procurement price inflation, which should lead to a 1.5 percentage point decline in CPI inflationand cause the GDP deflator to rise by only 5% in 2013-14.

Instead of changing its policy goalposts more often than most people change their toothbrushes, RBI should state clearly that Indian inflation has been primarily food inflationand that a necessary and near sufficient condition for food inflation to decline is that procurement prices are contained. There hasnt been, nor is there at present, any excuse for RBI not to make this connection explicit. The finance ministrys Economic Survey has said it, so why cant RBI just say it What is holding it back Perhaps the belief that saying this would forcefully reject its outdated monetarist ideology Is it so difficult for RBI and its prominent mentors to admit that they have been frightfully wrong in interpreting the determinants of Indian inflation in the years of Soniaism How much will Indian growth, jobs, and poverty reduction be sacrificed on the joint altars of Soniaism and monetarism

The UPA government has already made a down-payment towards a better tomorrow by sensibly raising wheat prices by only 5% in October 2012. Budget 2013-14 is neutral in its down-payment to RBI, but it did make one by reducing the deficit to only 5.2 % in 2012-13. Enough reason for RBI to cut repo rates by 50 basis points on March 18, and indicate a further 50 basis point cut in April contingent upon a less than 5% increase in rice prices. It is now over to RBI.

Surjit S Bhalla is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Blufin, a leading financial information company. He can be followed on Twitter, @surjitbhalla