Global Uncertainty Rising, Need To Maintain 'Margins Of Safety', Says CEA Anantha Nageswaran

The Chief Economic Advisor, V Anantha Nageswaran, said on Thursday that global uncertainty has been rising after the recent developments in the United States and that 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He said the global growth estimates of the International Monetary Fund given in January look outdated, and countries will have to watch what the developments in the U.S. over the last week will do to confidence, bank lending growth, and the subsequent chain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 the 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 by the California Department of Financial Protection and Innovation, which later appointed the Federal Deposit Insurance Corporation as its receiver.

Speaking at the Crisil India Outlook seminar, Nageswaran said uncertainty has been on a rising trend and has gone up a few notches in the last week, and this is something 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, household balance sheet planning, 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 hikes, then we have to wait and see what happens to real interest rates in the United States and what that will do to the U.S. 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, on the overall economy, etc. It is a fairly difficult situation that central banks around the world, especially in 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 U.S. 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, that 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 gross domestic product growth is expected to be 7% in the 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, agricultural output, monetary policy, etc."

With regard to the next fiscal year, Nageswaran said the growth projection of 6.5% has more downside risk than 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, and we are well above pre-pandemic levels, and private consumption as a share of gross domestic product, if you look at three-quarters of the data for the last five financial years, has been rising," he said.

He said one should not be overly optimistic when talking about 8–9% GDP growth in the current environment. 'If you can achieve and sustain growth of 6.5–7% or even 6.4–7% in the next seven–eight 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 gone 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 the next fiscal has been assumed at 10.5%, 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 two-three years of steady 10% 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.