CLSA predicts enhanced support for rural sector under new government
While the government has made significant strides in public capital expenditure (capex), reducing the fiscal deficit to 4.5% will require an increase in private capex.
Indranil Sen Gupta, Economist and Head of Research at CLSA India, anticipates that the government will intensify efforts to address the rural slowdown by potentially increasing farmer subsidies and providing targeted income support for women in poor households.
While the government has made significant strides in public capital expenditure (capex), Gupta believes, reducing the fiscal deficit to 4.5% will require an increase in private capex.
This is the verbatim transcript of the interview:
Q: Your recent note states that you expect some government measures to help with rural distress. Monsoons have been good, but there are about 8-9 months of the effect which needs to be countered. Run us through what are your expectations and what should we see?
A: We had El Nino and that led to a poor crop, the last Kharif and farm income was flat to down and even now you have had a somewhat better rabi, but then there is the summer heat, and we have to see how that plays out. The good news is that you get La Nina coming, so the Meteorological Department thinks the rains will be 106% of normal, and that should make for a bumper kharif crop. At the same time, given that farm income has taken a hit, it's very unlikely that farmers will start spending till they have realised their proceeds from the crop, which will drag on till about December. The government has been taking several measures. They have extended free rice and wheat to 80% of the population. There is Bharat Rice, and Bharat Wheat, which are being sold at subsidised levels. Now the import duty on wheat has been brought down. I think that there will probably be further measures funded by this $12 billion additional profit transfer that the Reserve Bank of India (RBI) has been able to make. So, one of the options is to raise the farmer subsidy maybe to ₹8,000 from ₹6,000, which costs about $2 billion. Another could be to offer one woman per poor household, ₹1,000 a month and that will cost about $12 billion between September to March, which would be met by the RBI and in subsequent years, you would see 0.5% of the gross domestic product (GDP) of the spending from the budget. So, given that the government has this option of higher RBI income, maybe they will shift to funding welfare schemes or try to help rural India.
Q: But it's not a shift away from focusing on some of the investment schemes, right?
A: No, this year, there is no conflict. Next year, we have to see. But this year, since you have this additional money from the Reserve Bank of India, there is no conflict.
A: There gradually has to be a lower pace given the amount that has been put in by way of public capex. Plus, if you are trying to bring down the fiscal deficit to 4.5%, then naturally you have to slow down on the public capex side. The Honourable Finance Minister said that we have done the heavy lifting now at some stage private capex will come in.
Also Read: Morgan Stanley's Ridham Desai optimistic on India's economy despite coalition govt
Q: How much of these contributions you could return in the form of GDP growth for us?
A: If you look at econometric studies, they say that a dollar of government consumption-based spending brings a rupee of GDP, and a rupee of capex spending brings about ₹2.5 of GDP. But the point is that ₹2.5 takes a long time to come. Therefore, maybe somewhere you need to balance both the immediate as well as the future.
Also Read: ‘This century is for India,' says Kaku Nakhate of BofA; foresees rise to third-largest economy soon
Q: This morning you put out a note where you say that the Somanathan Committee recommendations on how to administer pensions for government employees, may come through. Your conclusion was that if the recommendations are implemented, about 75% of what the OPS, the old pension scheme for people who retired before 2004, that income can come through as pension if these recommendations are implemented. How likely is this likely to go through in your opinion?
A: I would not know that, but based on media reports, what I understand is that if the OPS was worth about ₹100, the NPS was worth about ₹21. And if Mr Somanathan’s proposals as reported in the media go through, then the new scheme would be worth about ₹73. And given there will be a boost to the incomes of government employees, we expect a fillip to discretionary demand, whether it is in auto, whether it is in housing.
Catch all the latest updates from the stock market here
While the government has made significant strides in public capital expenditure (capex), Gupta believes, reducing the fiscal deficit to 4.5% will require an increase in private capex.
This is the verbatim transcript of the interview:
Q: Your recent note states that you expect some government measures to help with rural distress. Monsoons have been good, but there are about 8-9 months of the effect which needs to be countered. Run us through what are your expectations and what should we see?
A: We had El Nino and that led to a poor crop, the last Kharif and farm income was flat to down and even now you have had a somewhat better rabi, but then there is the summer heat, and we have to see how that plays out. The good news is that you get La Nina coming, so the Meteorological Department thinks the rains will be 106% of normal, and that should make for a bumper kharif crop. At the same time, given that farm income has taken a hit, it's very unlikely that farmers will start spending till they have realised their proceeds from the crop, which will drag on till about December. The government has been taking several measures. They have extended free rice and wheat to 80% of the population. There is Bharat Rice, and Bharat Wheat, which are being sold at subsidised levels. Now the import duty on wheat has been brought down. I think that there will probably be further measures funded by this $12 billion additional profit transfer that the Reserve Bank of India (RBI) has been able to make. So, one of the options is to raise the farmer subsidy maybe to ₹8,000 from ₹6,000, which costs about $2 billion. Another could be to offer one woman per poor household, ₹1,000 a month and that will cost about $12 billion between September to March, which would be met by the RBI and in subsequent years, you would see 0.5% of the gross domestic product (GDP) of the spending from the budget. So, given that the government has this option of higher RBI income, maybe they will shift to funding welfare schemes or try to help rural India.
Q: But it's not a shift away from focusing on some of the investment schemes, right?
A: No, this year, there is no conflict. Next year, we have to see. But this year, since you have this additional money from the Reserve Bank of India, there is no conflict.
Q: But even in the interim budget, when they presented, for many of the capital expenditure (capex) sectors, roads top the list, which is closely tracked, the rate of growth of allocation, FY25 budget estimates was far lower and that is of course because the government has already over the last many years doing a lot of heavy lifting. Do you expect that to continue when we get the full budget?
A: There gradually has to be a lower pace given the amount that has been put in by way of public capex. Plus, if you are trying to bring down the fiscal deficit to 4.5%, then naturally you have to slow down on the public capex side. The Honourable Finance Minister said that we have done the heavy lifting now at some stage private capex will come in.
Also Read: Morgan Stanley's Ridham Desai optimistic on India's economy despite coalition govt
Q: How much of these contributions you could return in the form of GDP growth for us?
A: If you look at econometric studies, they say that a dollar of government consumption-based spending brings a rupee of GDP, and a rupee of capex spending brings about ₹2.5 of GDP. But the point is that ₹2.5 takes a long time to come. Therefore, maybe somewhere you need to balance both the immediate as well as the future.
Also Read: ‘This century is for India,' says Kaku Nakhate of BofA; foresees rise to third-largest economy soon
Q: This morning you put out a note where you say that the Somanathan Committee recommendations on how to administer pensions for government employees, may come through. Your conclusion was that if the recommendations are implemented, about 75% of what the OPS, the old pension scheme for people who retired before 2004, that income can come through as pension if these recommendations are implemented. How likely is this likely to go through in your opinion?
A: I would not know that, but based on media reports, what I understand is that if the OPS was worth about ₹100, the NPS was worth about ₹21. And if Mr Somanathan’s proposals as reported in the media go through, then the new scheme would be worth about ₹73. And given there will be a boost to the incomes of government employees, we expect a fillip to discretionary demand, whether it is in auto, whether it is in housing.
Catch all the latest updates from the stock market here
(Edited by : Shweta Mungre)
First Published: Jun 12, 2024 1:05 PM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!
