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    Not the right time for fiscal consolidation: Krishna Memani

    Story outline

    • Longer term policy goals should not be neglected.
    • I would expect government to maintain level of spending.
    • Policies to provide breathing space to banks, NBFCs needed.
    Krishna Memani, Vice Chair of Investments at Invesco, believes it is not the time for fiscal consolidation for the Indian economy at the Union Budget. In an e-mail interview from US, he said he would like to see the government maintain the level of expenditure, given the low inflation and lower global interest rates. Immediate measures are required at the Union Budget to provide some relief to the banks and NBFCs are crucial, “lest the Indian economy falls off a cliff in an unfolding global slowdown”. Edited excerpts:

    The government is hard-pressed to address the growth slowdown. What according to you are the key things the FM can do in Budget to turn the tide?
    While maintaining fiscal discipline is critical from a longer-term perspective, this is not the time for fiscal consolidation as it will have a negative impact on growth. The government can’t afford that right now. With low inflation low and global interest rates heading lower, I would look to see that they maintain the level of spending.

    Going by market behaviour in the runup to the Budget, it seems like Dalal Street is definitely not expecting anything big. Which sectors do you think will get a boost from this Budget?
    The biggest problem and therefore the biggest opportunity for the government to have an impact on the markets is if they find a way of solving the current liquidity crunch. Unfortunately, the annual budget is probably not the way forward. On the other hand, if they announce some initiatives to reenergize the export sectors, especially in light of the tariff related pressures from the US, that would be very helpful to a critical set of industry segments.

    What steps can the FM take to arrest the slowdown in economic growth?
    The current slowdown is driven by a liquidity squeeze created by the policies implemented by Modi in the previous government including demonetization. Clearly, the RBI hasn’t helped much as well.
    A set of policies to provide a bit of breathing room to the banks and NBFCs is critical at the moment, lest the Indian economy falls off a cliff in an unfolding global slowdown. It will require unconventional thinking on part of the banking regulators. However, as the Fed proved in 2008 and 2009, if there is a political will, ways can be found to solve this problem. They have no choice but to find a path forward.

    How should the sectoral bias in one’s portfolio look like as he/she navigates the current state of the economy and markets?
    For us, it has never been about sectors. It really has been about companies and management teams and that is what we remain focused on.

    Do you think the FM will tinker with long-term capital gains (LTCG) tax? Why or why not?
    They certainly could. But what the tax cuts in the US proved is that such tax cuts in a bad macro environment get saved rather than spent. So, such tinkering will boost the markets but not the economy and therefore it would be a bad policy choice on the fiscal front. Those resources would be better spent on actual demand initiatives rather than tax cuts at the moment.

    What is your wish list for the budget?
    As a long term investor in India, we are more focused on new growth initiatives from the government rather than the Budget. Doing too much in the Budget at the expense of longer term policy goals would be a missed opportunity and I think the Modi government knows that.
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