Interview: Uncertainty on external demand can temper India's growth momentum, says Dhiraj Nim of ANZ Research

As Asian and emerging market economies fuel global growth, India has stood out for being the fastest growing in the lot. Its strong economic fundamentals are reflected in the stability of the rupee which has become one of the least volatile currencies in Asia.

With prime minister Narendra Modi's newly elected third government set to announce its intent in its annual budget on Tuesday, Invezz spoke to Dhiraj Nim, economist and FX strategist at ANZ Research to know his expectations from the same, his forecast of India's GDP growth and outlook on the rupee. Excerpts:

Invezz: What are your expectations from the upcoming Budget and suggestions for the same?

My key expectations are that the government will lower the fiscal deficit target to 4.9% of GDP, and thereby cut the net and gross borrowings. This is by utilising a part of fiscal bounty due to excess RBI dividend and strong tax growth.

I expect the capex target to remain unchanged at INR 11.1 trillion or 3.4% of GDP.

The government can increase the revenue expenditures by 0.2-0.3% of GDP.

Strengthen consumption to accelerate growth

Invezz: The IMF has raised India's economic outlook. How do you read this development? What are the key factors to work on for a higher growth rate?

We expect GDP growth below the IMF forecast at 6.8%, a strong number nevertheless.

For higher growth, consumption must strengthen, for which less unequal growth in jobs and incomes will be needed. 

Invezz: Citibank recently said a 7% growth rate is not enough for India to create enough jobs for the next decade. The country has for a while seen jobless growth. What is the government doing wrong or not doing right to address this?

I think this is a broader structural problem and there is no easy fix. Some of the unemployment pressure may ease this year with a rural economy revival. But the pressures in low end manufacturing like textiles, leather etc could be due to many factors, including loss of competitiveness in global trade. The revival of these labour intensive industries will be imperative. 

In the services sector, job and income growth has favoured the better skilled workforce.

Adequate education and training expenditures that not only ensure scale but quality of skilling are needed. Their absence has created huge impediments for India's demographic dividend. 

Rupee's stability not natural but engineered

Invezz: The rupee has largely held strong against the dollar last year. What are your comments on its performance this year so far and your outlook for the remaining year. 

Competitiveness is important both for manufacturing and exports, especially when currencies like the yuan have become super competitive on an effective basis. 

Invezz: Do you think the agreement between India and other countries to execute trade in INR will be a gamechanger for the currency?

This is a long shot game. However, invoicing trade in local currency means greater stability when dollar fluctuates widely. It also means lesser need to hold large FX reserves, which often come at a cost, such as complications in domestic liquidity management during bouts of high inflation.