VOTE ON ALL COUNTS
The Economic Times, February 17, 2009, Page 1
THE FINAL UPA BUDGET WAS NOTHING BUT A CURSORY RUNDOWN OF THE GOVERNMENT’S ACHIEVEMENTS. IT DISAPPOINTED INDUSTRY. THE MARKETS, TOO, REACTED NEGATIVELY BY SLIDING 329 POINTS
A SUMMARY DISMISSAL OF SLOWDOWN
SWAMINATHAN S ANKLESARIA AIYAR
The Economic Times, February 17, 2009, Page 1
THE FINAL UPA BUDGET WAS NOTHING BUT A CURSORY RUNDOWN OF THE GOVERNMENT’S ACHIEVEMENTS. IT DISAPPOINTED INDUSTRY. THE MARKETS, TOO, REACTED NEGATIVELY BY SLIDING 329 POINTS
A SUMMARY DISMISSAL OF SLOWDOWN
SWAMINATHAN S ANKLESARIA AIYAR
DISSECTS THE INTERIM BUDGET
Y-A-A-A-W-N. The interim budget was the mother of all anti-climaxes. Instead of virtually launching the Congress party’s election campaign, as was widely expected, stand-in finance minister Pranab Mukherjee produced a long, bald statement of government accounts, so boring that some members of Parliament nodded off. Not a single new scheme or tax initiative relieved the tedium.
The business community, hoping for relief for recession hit sectors and a spur to demand, was disappointed. The Sensex plummeted 329.2 points. However, this index was down 200 points even before the budget speech ended, so much of the fall was due to gloomy global factors. The budget speech deepened the gloom.
Mr Mukherjee claimed that constitutional propriety obliged him to stick to a bare statement of accounts, and not announce any new schemes or tax proposals. However, this claim of propriety drew gasps of disappointment at what was widely seen as a missed golden opportunity. Such cynicism emanates from the fact that a government with seven tainted Cabinet ministers cannot with a straight face claim that propriety is top priority. So, Mr Mukherjee’s anticlimactic budget was widely interpreted as tactical. Sonia Gandhi will very soon be launching the party’s election campaign, and analysts speculated that she might not want Mr Mukherjee to steal any of her thunder. Party insiders said the public should expect something big very soon.
Bond yields rose with the revelation that government borrowing for 2009-10 is being budgeted at almost Rs 200,000 crore higher than the original estimate. However, it is not much higher than the revised budget figure for 2008-09; so the bond market has overreacted. Besides, the finance secretary later said the additional borrowing would not fall entirely on the markets—meaning RBI will be a big buyer.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-budget items like dues to oil and fertiliser companies. Throw in another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However, at a time of deep recession this should be seen as an economic stimulus rather than profligacy. Indeed, the government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. Mr Mukherjee said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism (for ex. farm loan waivers) has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages.
For 2009-10, the budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment. These ratios assume that nominal GDP will rise 10.97% next year, with inflation accounting for around 4% and real GDP growth for around 7%.
Y-A-A-A-W-N. The interim budget was the mother of all anti-climaxes. Instead of virtually launching the Congress party’s election campaign, as was widely expected, stand-in finance minister Pranab Mukherjee produced a long, bald statement of government accounts, so boring that some members of Parliament nodded off. Not a single new scheme or tax initiative relieved the tedium.
The business community, hoping for relief for recession hit sectors and a spur to demand, was disappointed. The Sensex plummeted 329.2 points. However, this index was down 200 points even before the budget speech ended, so much of the fall was due to gloomy global factors. The budget speech deepened the gloom.
Mr Mukherjee claimed that constitutional propriety obliged him to stick to a bare statement of accounts, and not announce any new schemes or tax proposals. However, this claim of propriety drew gasps of disappointment at what was widely seen as a missed golden opportunity. Such cynicism emanates from the fact that a government with seven tainted Cabinet ministers cannot with a straight face claim that propriety is top priority. So, Mr Mukherjee’s anticlimactic budget was widely interpreted as tactical. Sonia Gandhi will very soon be launching the party’s election campaign, and analysts speculated that she might not want Mr Mukherjee to steal any of her thunder. Party insiders said the public should expect something big very soon.
Bond yields rose with the revelation that government borrowing for 2009-10 is being budgeted at almost Rs 200,000 crore higher than the original estimate. However, it is not much higher than the revised budget figure for 2008-09; so the bond market has overreacted. Besides, the finance secretary later said the additional borrowing would not fall entirely on the markets—meaning RBI will be a big buyer.
The fiscal deficit, budgeted at 2.5% of GDP this year, will end up at 6%, to which should be added another 1.5% of GDP for off-budget items like dues to oil and fertiliser companies. Throw in another 3.5% of GDP of state government deficits, and India will have a consolidated fiscal deficit of 11% in 2008-09, as high as in the crisis year of 1991.
However, at a time of deep recession this should be seen as an economic stimulus rather than profligacy. Indeed, the government virtually boasts that its expanded fiscal deficit amounts to one of the biggest fiscal boosts anywhere in the world. Mr Mukherjee said the government would return to the high road of fiscal responsibility after the economy stabilised.
Ironically, what looked last February like pre-electoral populism (for ex. farm loan waivers) has turned out to be well-timed Keynesianism. The actual disbursement of both the farm loan waiver and Pay Commission award started in October, bang on time to counteract the global meltdown. This populism constitutes a bigger stimulus in hard cash than the two formal stimulus packages.
For 2009-10, the budget envisions a slightly lower fiscal deficit of 5.5% of GDP. The revenue deficit, budgeted at 1% of GDP last year, is budgeted at 4% next year. This means much of the higher government borrowing will be for give-aways and not hard investment. These ratios assume that nominal GDP will rise 10.97% next year, with inflation accounting for around 4% and real GDP growth for around 7%.
ECONOMIC TURNOUT
THE ECONOMY
TAX burden likely to moderate next year to shore up private consumption
GOVERNMENT will also step up spending to stimulate growth in a slowing economy
INCREASED spending to be financed largely through borrowings. Central and state fiscal deficits to add up to 11% of GDP
INDUSTRY & CORE
CEMENT, steel and construction to benefit from boost to infrastructure
CONSUMER goods companies to gain from increased rural demand
TEXTILES, carpets, leather, gem and jewellery, marine product makers to enjoy lower interest rates till September 30
UNIQUE ID plan to benefit software firms
THE MARKET
STREET disappointed with the budget. The Sensex and Nifty fall 3% each
REALTY, banking and metal shares among the worst hit, respective indices down 4-5%
PROSPECTS of large govt borrowings leading to higher interest rates reflect in the bond market as prices dip and yields harden
MORE funds for infrastructure as refinance to banks through IIFCL stepped up
SOCIAL SECTORS
CHEAPER credit for farmers to continue
MORE primary health centres and increased spend on education
CITY infrastructure & transport get a boost through more funds for urban renewal scheme
PENSION for widows below poverty line
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