Global uncertainty rising, need to maintain 'margins of safety': CEA V Anantha Nageswaran

Chief Economic Advisor V Anantha Nageswaran on Thursday said the global uncertainty has been rising after the recent developments in the United States and governments, businesses and individuals should keep 'margins of safety' in fiscal, corporate and savings account planning. He said the global growth estimates of the International Monetary Fund (IMF) given in January looks outdated and countries will have to watch what the developments in the US over the last week would do to confidence, bank lending growth and the subsequent chain effects.
Two banks in America have gone belly up over the last week. Signature Bank, New York, which lent mostly to crypto industry was shut down by the regulators on Sunday after there was a run on their deposits.

Besides, the failure of Silicon Valley Bank last week left many startups, tech companies, entrepreneurs and VC funds nervous and jittery. SVB, the 16th largest bank in the United States, was closed on Friday last by the California Department of Financial Protection and Innovation which later appointed the FDIC as its receiver. Speaking at the Crisil India Outlook seminar, Nageswaran said the uncertainty has been on a rising trend and has gone up a few notches in the last week and this is something which countries need to live with, not only this year but for the next year and beyond.

"And the important thing to remember is that when you are facing uncertain times, the key thing to do is to make sure that we have margins of safety in our operations, whether it is for corporates or for investors. The only guidance one can think of is to allow for margins of safety, whether it is in fiscal planning, corporate planning or household balance sheet or savings account planning," he said. He said if the developments that have happened in the last week do create a necessity for the Federal Reserve to pause interest rate hike then we have to wait and see what happens to real interest rates in the United States and what will that do to the US dollar.
"And also, what implications it will have for emerging economies, which I believe will be mostly positive in one sense, that is, the pressure on their currencies will abate. On the other hand, if the

Federal Reserve had to go ahead with its tightening programme, having provided liquidity backstop and put in place some other arrangements to make depositors whole, then we have to wait and see what kind of domino effect it might create on other banking institutions and on the overall economy etc. It is a fairly difficult situation that central banks around the world, especially advanced economies, are confronting," Nageswaran said. He said at this moment, it may be somewhat difficult to quantify the net effect of these developments on countries like India. "The overall positives would be the implications it would have for global demand, for oil prices and for the US interest rates and the dollar. Those kinds of reactions will be mostly positive for us, even if there is an impact on export growth," he said.

"You can see the rapidity with which things are evolving, and it is difficult to provide long-term guidance for anyone. It's important, therefore, we allow for uncertainty in our planning processes. And I think to some extent, we have tried to do it in our fiscal policy," Nageswaran said. He said India's GDP growth is expected to be 7 per cent in current fiscal. "If we are able to get through another week with temperatures in the current ranges, I think the wheat harvest because of the early sowing will also happen ... And we may be able to get a good crop. And this will have positive chain reactions going forward, for inflation, for agricultural output, for monetary policy etc".

With regard to next fiscal, Nageswaran said the growth projection of 6.5 per cent has more of downside risk than the upside risk. "Of course, all of this is subject to assumptions about how the world situation, both in politics and economics, will look like. But by and large, we look at all sectors, we are well above pre-pandemic levels and private consumption as a share of GDP, if you look at three quarters of data for the last five financial years, it has been rising," he said. He said one should not be overly optimistic talking about 8-9 per cent GDP growth in the current environment. "If you can achieve, sustain growth of 6.5-7 per cent or even 6.4-7 per cent in the next 7-8 years until the next decade, we would have done very well". He said public sector capex has been rising in the last several years and has been going up by three times, concentrating on several sectors. Naturally at some point, public sector capex has to take a step back and the private sector will have to carry on the good work. Public sector capex has created the physical infrastructure for better manufacturing growth and export performance in the years to come, Nageswaran said.

The chief economic advisor in the finance ministry also said that the nominal GDP growth for next fiscal has been assumed at 10.5 per cent, and though India remains optimistic, it is aware of the formidable array of challenges that confronts both developing and advanced economies.
"We do require just 2-3 years of steady 10 per cent nominal GDP growth for fiscal parameters to show meaningful improvements. So while it is clear that the quality of expenditure is improving and there is still room for improvement both with respect to quality and quantitative parameters, exaggerated hand wringing may not be necessary," he said.

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