India to be a $3.5 trillion economy by 2020: Sonal Varma, Nomura

A gradual economic recovery
is under way in India, and the economy
can easily hit the $3.5 trillion mark in
next five years, provided the government
keeps the reform momentum going,
Nomura India Executive Director and India
Economist Sonal Varma said in a webinar
organised by ETMarkets.com on
Thursday.
For India to become a $3.5 trillion
economy, GDP has to grow at 7.5-8 per
cent on a sustainable basis, which is not
that tough, given the reforms roadmap
that the government has. Lower crude oil
prices will help contain inflationary
pressures and fiscal deficit, which will in
turn draw higher foreign direct investment,
she said.
FDI or foreign direct investment is a more
stable form of capital flow, which can
strengthen the fundamentals of any
economy. Data suggests the current
account deficit was financed by FDI flows
this time around, which has put lesser
weight on the government’s balance
sheet, which is a big positive.
“We are already a $2 trillion economy,
growing at a nominal rate of around 11.5
per cent (7.5 per cent real + 4 per cent
inflation ),” Varma said. “It is not a tough
ask. What we need to do is ensure that
policies are enacted that can sustain our
growth at 7.5-8 per cent without
generating inflationary pressures,” she
added.
The green shoots visible right now are FDI
flows and private capex, which are
showing a pickup. Varma said various
stalled projects have been revived, which
is a positive trigger for both the economy
and the markets.
There were less number of stalled
projects in June 2015 compared with the
year ago period. Private capital
expenditure this year is much better than
past two years. Apart from that, the
government has been on a reform
overdrive and has announced various new
projects in chemical products, metals,
electricals, transport services,
construction and real estate segments.
However, business confidence is still
mixed. Although it had improved post
elections in mid-2014, but that tempo
seems to have been lost, the Nomura
economist said.
According to Varma, weak global demand,
especially the slowdown in China, is also
weighing on the market sentiment. A good
budget, clearer signs of domestic growth
recovery and faster reforms can be
positive triggers for the market.
The forthcoming budget will be important
for markets and economy. However,
Varma does not see any populist measure
from the government even though the
outcome of the Bihar elections were not
in line with what most market participants
were hoping for.
What can strain on India’s balance sheet
is impact of the Seventh Pay Commission,
which could be as high as 0.7 per cent of
GDP. The government has to figure out
ways to finance this expenditure. Even
most global credit rating agencies have
voiced their concerns over the same.
The total impact of the pay commission
award is estimated to be Rs 1,02,000
crore, which would be 0.7 per cent of
GDP. Of this, the central government will
have to budget for around 0.5 per cent of
GDP and the rest has to be paid by
railways, Varma said.
Asked about various avenues from which
the government can raise money, she said
it may have to hike the service tax rate
(14.5 to 16 per cent) or/and excise/
custom duties or go for higher asset sales
(not only disinvestment, but also telecom
spectrum).
She said government’s capital expenditure
(as a percentage of GDP) may take a hit
as a result of the pay panel award.
Global rating firm S&P has already
expressed concerns over the slowdown in
the pace of reforms. India’s rating can
come under stress if the government fails
to pursue its reforms agenda and
overshoots the fiscal deficit target, it said.
“We are not expecting any populist
measure in the budget. But credit rating
agencies would want to see the impact of
the Seventh Pay Commission on fiscal
prudent (both centre and states), reforms
outlook (especially GST ) and growth
outlook,” Varma added.
“We are not expecting a downgrade, but
no upgrade either. The outlook is stable
for now,” she said.
US Federal Reserve rate hike:
Commenting on concerns over the
impending rate hike by the US Federal
Reserve, Varma said there might be some
nervousness ahead of the hike, but it
would also clear the uncertainty.
Nomura’s view is that the Fed will hike
rate in December, but the future pace
would be gradual: only two 25bp hikes
throughout 2016. So, the hikes should not
be too disruptive, she said.