Inflation | MPC meet: This time it’s LIC, not onions on RBI’s mind
Just to decide on one thing – interest rate – the monetary policy makers have to wear different hats even if they are uncomfortable with some of them. That ranges from being a geopolitical strategist to a meteorologist. The magnitude of influence that any of these have in decision making varies on the circumstances. This time around it may well be their human resources capabilities.
Reserve Bank of India Governor Shaktikanta Das, who would be steering the Monetary Policy Committee debate this week, would have to dip into his four-decade-old bureaucratic experience to evaluate whether disinvestment revenue target is for real. That would decide his market guidance since he may keep his fingers on the pause button.
Finance minister Nirmala Sitharaman delivered a budget that resisted the temptation to go for ‘fiscal stimulus’, which worried some members of the MPC that surprised the market by not lowering interest rate in its last monetary policy review in December.
“Lacklustre revenue collections alongside lower nominal GDP growth rate add to the risk of fiscal slippage,” Pami Dua, a member of the MPC, has said. “Thus, at this juncture, it would be prudent to take a cue from the upcoming budget on the government’s initiatives to revive growth.”
While equity market is blowing hot and cold over the budget being bereft of much direct benefits to the inpidual, bond markets – the barometer of fiscal prudence – cheered with a jump in the value of bonds after taking 48 hours to digest the numbers presented by the minister.
The Monetary Policy Committee, which is meeting at the RBI headquarters in Mumbai, may well be relieved that the North Block did not strain them much with loose fiscal policy, but a detailed scrutiny may well be done on some revenue assumptions.
The current fiscal is a let down in terms of revenue growth which fell far short of the target due to poor tax collections. But what about next year? The tax receipt growth target of 12%, lesser than last year’s budget estimates, may appear reasonable, but doubts about non-tax revenues linger.
The key component is revenue from pestment of stake in state-run units. Minister Sitharaman has budgeted Rs 2.1 lakh crore from sale of assets, including listing of the Life Insurance Corp which could become a political lightning rod and selldown of the IDBI Bank stake.
“The government has set a massive disinvestment target for next year,” says Sonal Varma, economist at Nomura Securities. “This makes for a particularly challenging disinvestment calendar and could very well disappoint by as much as Rs 1 lakh crore.”
Revenue from disinvestment has become a staple in the budget documents for over two decades now. But the result at the end of every year has been more disappointing than the previous one.
The government has missed its disinvestment target in 16 of the past 22 years, data from CARE Ratings show. If transactions between stateowned enterprises like ONGC buying HPCL is excluded, the miss goes up to 18 years. This could dominate the monetary policy debate when it comes to fiscal numbers.
The next fiscal’s target of Rs 2.1 lakh crore comprises Rs 90,000 crore from the financial sector, and the remaining from others such as Container Corp and Shipping Corp whose pestment was to be completed in the current fiscal.
Life Insurance Corp, a household name, and IDBI Bank that managed to stay afloat because of a government-induced lifeline from the insurer about to be listed, dominate with nearly 45% contribution to non-tax revenue. How realistic is this?
While, in terms of valuation, the numbers could be trusted, what’s tricky is the timeline which would test the skills of the bureaucracy.
“There’s not much of an issue on the tax revenue front, but the non-tax revenue is the issue,” says A Prasanna, head of fixed income research at ICICI Securities Primary Dealership. “If LIC doesn’t happen, it would have a big impact.”
Listing LIC may fetch as much as Rs 80,000 crore, but a process that involves amending the Act through parliamentary vote, convincing Opposition parties and finding the right investment bankers, and launching the issue at a time when markets are optimistic are the challenges.
History shows it is a tall order. Finance secretary Rajiv Kumar gave enough indications when he said it could take a year to complete the LIC listing process. Furthermore, LIC has remained a different animal with its unique style of functioning and accounting. It needs to acquire the language that public investors are familiar with.
Now, monetary policy is all about inflation targeting. When Governor Das shocked the market with a pause in rates contrary to expectations of a cut, it was the soaring prices of onion and other vegetables that forced his hand. Inflation soared over 7% in December, when the target for MPC is to keep it at 4% with a 2 percentage point persion on either side.
Onion prices that shot up to an average of Rs 95 a kg has eased since and is down to around Rs 65. So are the prices of other fruits and vegetables with the arrival of fresh crops that has cooled the price outlook.
“It is for this reason that we do not really lose sleep over the CPI inflation spike driven by the temporary jump in onion prices as well as the base effect which should reverse from February,” says Indranil Sen Gupta, chief economist at Bank of America, which has forecast Consumer Price Index falling to 4.3% in March if onion price comes down to the normal Rs 20 and at 4% by October if the rain gods are kind.
Furthermore, global outlook may be turning grim because of the collapsing economic activities in China due to the spread of coronavirus which has affected global trade. It has already led to economists predicting China’s growth to slow down to just 4% in the quarter, and spread to other nations in the region as well.
This is adversely impacting commodity prices, including crude oil, which is a blessing in disguise for India where three-fourths of the oil needs are imported.
The LME index, which comprises vital commodities such as aluminium, zinc and copper, is down 10.4% in the past ten days, data from Bloomberg shows. Iron ore and crude prices have tumbled triggering talk of production cuts.
These should help the inflation-targeting MPC to keep its accommodative stance, while signalling a reduction when the actual CPI forecast is below its target of 4%.
“We see the current inflation spike as transitory and expect a lack of fiscal activism to open up monetary policy space,” says Varma of Nomura. “We also expect the RBI to leave policy rates unchanged and retain its accommodative stance next week, but signal future easing.’’ Even if inflation is benign, it is the fiscal that could worry MPC as it did last year when tax receipts fell below estimates worrying markets that borrowing could go out of control.
The RBI had to do its own ‘Operation Twist’ to calm bond investors’ nerves.
Revenue slowdown might have forced RBI to manoeuvre the market, but what if pestment department misses the target. Even the Saudi monarchy had to shelve its plans twice and took three years to list Saudi Aramco after making its listing intentions public in 2016.
Can the Indian bureaucracy pull off the one that Saudi prince couldn’t?