Decision to set tough deficit target makes sense

Written by Mithun Dasgupta | Updated: Jul 31 2014, 07:34am hrs
Foreign investors are now more comfortable with India as they think the country is on a better economic growth path, says Geoff Lewis, the executive director and global market strategist of JPMorgan Asset Management. In an interview with Mithun Dasgupta, Lewis said the Modi governments fiscal deficit targets are tough to meet, but at this stage it makes more sense to set a tough target than an easy one.

Seeing the railway and general budgets, do you think the Modi government has addressed the issue of policy paralysis that plagued the last regime

Modinomics was never going to be completely revealed in the first budget; it was too soon. You have to give him some time. I think he got plenty of time, and I dont think that you should expect the supply-side reforms to even begin affecting the economy before 2016. Prime Minister Narendra Modi was constrained by finance minister Arun Jaitley, because he is on the path of fiscal consolidation. So, you cant do a lot of things in terms of new projects, and you have to wait for the economy to pick up first. And they have realised thatThe budget, however, announced a lot of things.

The Modi government has pledged to keep the fiscal deficit at 3.6% in 2015-16 and 3% in 2016-17. Do you see these as achievable

I know the government has been criticised for setting targets which may be a bit unrealistic. But, I think, sometimes it is good to have targets not easily achievable. He (Jaitley) has numbers which look difficult to meet on the revenue and spending side. He seems to be relying on the likelihood of the economy picking up. It will be more efficient to divest from public sector businesses. So, it makes more sense at this stage to set yourself a tough target that you may miss than to set an easy targetI think Modi has to now show that he can work in harmony with state governments, especially those important to the economy.

In which sectors do you think the central government should work in tandem with states to improve efficiency

Agriculture, irrigation, water conservation, and energy efficiency. There could also be cooperation in terms of power distribution and land acquisition for speeding up infrastructure projects. Overall, I think he has to make some progress in reducing subsidy and raising infrastructure at the central level. The other encouraging thing is that Modi does not seem to be in a hurry to get back to 8-9% growth. Foreign investors also do not want that; they will be happier with a more sustainable 6-7% growth.

What is your view on the governments plan to boost economic growth to 7-8% within the next three to four years

I think the growth target could be achievable as we are going see a cyclical rebound anyway. You can see that momentum is already improving. Industrial production is already improving, and infrastructure-related industries are probably moving away from the absolute bottom. The new government will also benefit from some measures that the previous administration took to speed up things in certain areas. There is sufficient determination and India could grow faster.