Singapore: The Indian government’s success in the last two weeks in re-auctioning coal blocks and telecom spectrum is not only bringing in money, but is important in terms of cleaning up these processes, said Sanjeev Sanyal, global strategist and managing director of Deutsche Bank AG, in an interview.

Sanyal also believes the Reserve Bank of India (RBI), which has already lowered the repo rate by half a percentage point since January, has the space to reduce it by another one-and-a-half points.

Sanyal said the new monetary policy framework would provide a transparent mechanism for decision-making, and put a stop to endless speculation about differences between the central bank and the finance ministry. Edited excerpts:

For investors, what were the takeaways from the budget?

The Union budget has radically redefined fiscal federalism. The states will now have a much larger share of revenue. This is not just about transferring revenue to states, but about the efficiency gains from decentralized decision-making and implementation. In turn, this means that both foreign and domestic investors need to pay much more attention to what individual states are doing. Nonetheless, many of the really interesting things in the budget speech relate to non-fiscal measures—a new bankruptcy code, a new monetary policy framework, new holding company for public sector banks, and so on. Thus, the success of this particular budget is all about implementation and not merely the announcement of intentions.

It must be added that serious investors do not just watch the budget speech, but the wider actions of the government. The budget did not dwell on this, but the government has had great success in the last two weeks in re-auctioning coal blocks and telecom spectrum. This is not only bringing in money, but is important in terms of cleaning up these processes.

Has the government succeeded in providing a long-term vision in the budget? Will the devil be in the details of implementation?

The government has indeed provided a multi-year roadmap. This is good but as you point out, we will only be able to judge it by its implementation. For example, we have been told that there will be “strategic disinvestment” but, given the long history of missed targets, we can only judge the proposal when we have witnessed actual sales. Similarly, it is great that the government is taking the issue of bankruptcy seriously. An investment-driven, entrepreneurial economy needs a way to keep unwinding investment mistakes rather than accumulating them. However, it is more than just about having good laws but also about the whole ecosystem, including the courts, the process of auctioning assets, and so on. Again, the devil is in the details of implementation. The same can be said about GST (goods and services tax). The good news is that we are at last discussing the nuts and bolts of such issues.

There has been some criticism of the budget on the fiscal deficit target—the government has pushed back by a year, to 2017-18, the deadline for cutting the deficit to 3% of gross domestic product (GDP), and for 2015-16, the deficit will widen to 3.9% of GDP, when compared with the earlier target of 3.6%. Is this a big miss, or is it acceptable, given the revised GDP estimates signal a return to the growth path?

I am not too concerned about small deviations from the fiscal consolidation trajectory. First, the finance minister did very well, given that the central government’s share of revenue was significantly reduced. We need to see how this impacts the finances of the states and what happens to the consolidated deficit. Second, the quality of spending should be considered. In recent years, investment spending was being reduced at the expense of current spending. Therefore, it depends on how well the government is able to control leakages in subsidies and shift towards infrastructure spending. In short, a small deviation in the fiscal deficit is not a big concern if the wider policy direction is correct.

What will the rating agencies make of the budget and the fiscal deficit targets? Over the last six months, there has been much talk about how India needs to get upgraded as an investment destination. Has that been undone due to the fiscal deficit? In your view, how critical would a ratings upgrade be for India?

I cannot speak for rating agencies, but the central government’s total outstanding liabilities are less than 50% of GDP, and almost all of it is internal debt. By global standards, this is not exceptionally high. In fact, the primary fiscal deficit is quite small and the main culprit is the high interest burden. If interest rates fall, as I expect, this will automatically decline. Similarly, external sector indicators are also stable or improving. India has admittedly been helped by low international oil prices, so this remains a risk, but the broad direction suggests that sovereign risks are easing. A sovereign ratings upgrade is always welcome but FDI and FII flows are driven by the investment opportunities that they can see on the ground. So the government should focus on improving the ease of doing business and on triggering the infrastructure investment cycle.

From a market’s standpoint, do you think this budget has justified the re-rating that the market has seen over the last 6-8 months? There have been 20-35%-plus gains on the index. Do you think this budget has done enough for the market to go higher from here?

The equity market has indeed gone up significantly over the last year, but the budget does include many measures that, if implemented, would justify the increase. This is why both domestic and foreign investors will closely watch how the government will go about putting the policies into action.

What do you think could have led to this out-of-policy rate cut? Do you think a rebound in crude prices could pose a challenge to inflation? Would that impact further interest rate cuts going forward? Would the markets now start perceiving RBI and the government are on the same page? 

The timing of the rate cut is RBI’s prerogative and we are not concerned about it being “out-of-policy”. Of course, there is always a risk of an external shock such as an oil price spike, but for now we think there is scope for further monetary easing.

The central bank has already lowered rates by 50 bps (basis points), and there is perhaps space for another 150 bps. Obviously, this has to be done in a carefully calibrated manner in order not to affect the exchange rate. (One basis point is one-hundredth of a percentage point). I think too much is made about tensions between the finance ministry and the Reserve Bank, and I hope the new monetary policy framework will provide a transparent mechanism for decision making and, thereby, put a stop to these endless speculations.

Where do you see India headed from here—near-term in calendar year 2015, and long-term over the next 3-4 years, after having watched closely and seen the Narendra Modigovernment in action so far?

I think most observers agree with the overall policy direction so implementation is the most important issue. As I have said in the past, Prime Minister Modi’s economic vision is similar to the East Asian growth model. This is all about the mass deployment of labour and capital to build infrastructure and manufacturing capacity. Cheap capital is a necessary ingredient of this model. The good news is that the global economy is awash with cheap capital, and China is likely to keep it cheap even if the US tightens (rates). Thus, we need to create conditions for absorbing cheap international capital as well as for deploying domestic savings. In the medium term, lower interest rates will help trigger the investment cycle but, in the long run, the ability of the financial system to allocate this capital is critical. The bankruptcy process is also very important as it is needed to constantly liquefy bad investments along the way. Finally, India has to be willing to hold very large foreign exchange reserves as a bulwark against external shocks that could derail the savings-investment virtuous cycle. It is not a big deal if a country of India’s size holds around half-a-trillion US dollars in reserves.