The Budget happens once a year but sets the direction for the year ahead. While it is clearly an important event, it does not take away the fact that finally the shape is determined by how various elements of economy perform through the year.
While the government can provide certain exogenous support, it has to operate within the overall constraints. People often tend to overestimate the bounds within which finance ministers have to operate.
As the recent financial crisis demonstrated, India’s growth is ultimately going to be a function of growth in the world. With global growth still remaining uncertain, India’s growth rates in the next few years will likely remain lower than those between 2003 and 2008
The trade and current account deficits, global commodity prices and financial flows are the three main channels through which impact is exerted. Secondly, India’s growth in the recent past has been driven mainly by reforms, while it was supported by external stimulus through various social inclusion schemes, pay-commission, etc.
However, with the shortages in fuel, growing import dependence for energy and rising prices of energy, India’s growth is vulnerable to external shocks. This introduces uncertainties in forecasts and reduces control over key variables.
This has impacted investment sentiment with several power projects now expected to make lower returns. Land and labour have also impacted growth through delays in implementation of several infrastructure projects affecting profitability and investment climate.
Lastly, government’s programmes have had an influence on labour incomes affecting food prices as productivity stagnated.
Considering the constraints, it was clear that deficits would remain at elevated levels, unless there is political will to take tough actions of price increases, which, in turn, would stoke inflation in the short term, but would still be more advisable in the longer term.
Considering the constraints, it was clear that deficits would remain at elevated levels, unless there is political will to take tough actions of price increases, which, in turn, would stoke inflation in the short term, but would still be more advisable in the longer term.
While the 5.1% target for FY13 seems aggressive (due to lower provisions for subsidies and probably higher assumptions for growth), we think that a bigger concern would simply be economic growth and the required reforms to enable the same. If India manages 7.6% forecast growth, we think there is some space for social programmes to co-exist with private sector growth.
However, without a second wave of reforms and lingering issues of subsidies/insufficient pass through of cost increases, we think there is a risk to these forecasts.
While several measures have been announced (Rajiv Gandhi equity saving scheme, simplifying IPO process, allowing QFIs to access Indian bond market, bank recapitalisations, introduction of bills on pension, banking, insurance in this session, further thrust on investment in infrastructure), the key challenge is implementation. While the government has also set out a plan to reduce deficits to 3.9% by FY15, the risks emerge from factors beyond our control.
These external challenges can still be overcome by ensuring strong focus on implementation of reforms and debottlenecking growth constraints. A higher growth can easily support policy objectives without stifling private sector.
Reduced dependence on imported energy through higher domestic supplies or increased efficiency would alleviate concerns and improve investment climate. These efforts are needed on an ongoing basis - not just on a single Budget day.
Jesal Shah is the Head of research, institutional equities, JM Financial
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