Markets Misreading Extent Of Stimulus In Budget 2020, Says JPMorgan’s Jahangir Aziz
Concerns that Union Budget 2020 has not done enough to support growth are unfounded, according to Jahangir Aziz, head of emerging market economics at JPMorgan. Aziz argues that adequate fiscal stimulus has been provided even though the headline fiscal deficit is budgeted to come down from 3.8 percent of GDP in FY20 to 3.5 percent in FY21, suggesting fiscal consolidation.
This is how Aziz sees it:
- If you take out privatisation from this year and next year, you get budget deficit of 4.1 percent in FY20 and a deficit of 4.5 percent next year.
- So there is a 0.4 percentage point increase in stimulus rather than a consolidation.
We do need to take out privatisation because that’s an asset swap and an asset swap does not effect income of corporations or households. So this concern, particularly in the equity markets, that there is no stimulus in the budget is not justified.Jahangir Aziz, Head - Emerging Market Economics, JPMorgan
Aziz added that the budget does have small measures to help the cyclical recovery, including steps to push the clean-up of the financial sector.
In Budget 2020, the government decided to invoke an ‘escape clause’ built into the revised Fiscal Responsibility and Budget Management Act. The clause allows the government to maintain its fiscal deficit at a level which is 0.5 percentage point above the budgeted level.
Aziz doesn’t have a quibble with the decision to invoke the clause but cautions against one possible implication of it. Invoking the ‘escape clause’ allows the RBI to buy government bonds in the primary markets, according to the FRBM (2018) Amendments.
Allowing the RBI to go into the primary market, is setting back all the progress we made in the last 20 years. This was a very hard fought shift that took place to make sure the RBI does not go into the primary markets....If the RBI does go into the primary markets, which I don’t think they will do, that is serious.Jahangir Aziz, Head - Emerging Market Economics, JPMorgan
Opening Up The Local Bond Markets
Finance Minister Nirmala Sitharaman in her budget speech also said the government would fully open up specific government securities for foreign investment. At present, the overall limit for foreign portfolio investment in government bonds stands at 6 percent of total outstanding bonds.
Aziz said this is a good way to target an entry into the global bond indices and has been used by countries like Brazil in the past. While the government has not specified which securities will be opened up, Aziz thinks the benchmark 10-year bond, which has adequate liquidity, would be best suited.
I think it’s important to open up the bond markets to foreigners. Not just because it is supply of cheap financing but because its extremely important to have a much more diversified set of investors in the local bond markets, which helps bring much more discipline to the debt markets.Jahangir Aziz, Head - Emerging Market Economics, JPMorgan
Global Risks Rising?
Commenting on monetary policy, Aziz said the quantum of rate cuts in 2020 may surprise to the upside, given the risks emerging globally from the outbreak of the Coronavirus.
Large shutdowns in China will impact global output and impart disinflationary forces across the global economy, he explained. JPMorgan currently expects another 50 basis points in rate cuts from India’s Monetary Policy Committee this year. The benchmark repo rate was reduced by 135 basis points in 2019.
I would argue the risk is more cuts rather than less cuts. Here is a budget that was presented after news of the outbreak of the Coronavirus. This is going to have a significant impact on regional growth and global growth...The major risks facing the world right are disinflationary forces and another, at least temporary, hit to growth.Jahangir Aziz, Head - Emerging Market Economics, JPMorgan
Aziz added that while rising headline inflation in India may not present the right optics for interest rate cuts, once the elevated food inflation eases, there should be room for more rate cuts than what the market is expecting.
Watch the full interview here: