Much awaited Budget mainly for reforms, hike in FDI limit financial industry, deliverance of an inclusive growth in the ecocomy were finally delivered by the Finance Minister of India, Pranab Mukherjee. Some of us were very happy with the proposals made in the House while other got disappointment on various front. For sure, India’s economic growth has been impacted by the global economic problems and the recovery in the western economy specially in the US would play a critical role in a growth of the Indian economy. The rising fiscal deficit, expenditures are not only a single major concern for the economy but the significant rise in government borrowings also does matter for the future growth, which would affect the borrowing cost (refer to the given below figure).
India's Fiscal Deficit for FY 2008-09 of Annual GDP at Current Market Price.
There is no doubt that the debt level of the Indian Government likely to puff up due to higher spending. First look at the brief synopsis of Budget 2009.
Mr Finance Minister has agreed upon the real challenges to get back to sustainable 9% GDP growth.
Finance Minister stressed upon infrastructure development by providing long term financial assitance to infrastruture projects via India Infrastruture Finance Company Ltd (IIFCL).
Increases allocations for National Highway and Railways projects.
Extension of repayment period from Jun 2009 to Dec 2009 under the Debt relief Program 2008 to the farmers having acquired land more than two hectares.
Gov’t of India commitment on restoring growth in export sector.
To Initiate Institutional Reform measures from this year to fix the rising Fiscal Deficit.
To allocate Rs 39,400 crores ($8.16 Billion) to National Rural Employment Guarantee Scheme (NREGS).
Total expenditure of Rs. 1,020,838 Crores ($209.62 Billion) according to the Budget Estimates 2009-10.
Abolishment of Fringe Benefit Tax (FBT) and removal of Surcharge on Income Tax.
Changes in Direct Tax Code.
Implementation of Goods and Service Tax (GST) from 1st Apr 2010.
Revision in Minimum Alternate Tax (MAT) from 10% to 15%.
Since the inflation is no longer a concern for the economic growth, India needs to opt for a better policies and reforms to achieve the macroeconomic stability. Interest rates become more stable backed by the comfortable liquidity situation in the system which would be prudent for the constant growth of the economy and to be self reliant driven by the domestic demand. Forasmuch, India seeing the higher non plan spendings due to Subsidy burden, Sixth Central Pay Commission, and food subsidy which would be a troublesome for the government to restructure its finances. Savings rate at 59% of the anual GDP and massive foreign reserves assets will put the Indian ecconomy on reposeful position in the global arena (helps the Indian economy to abstain from the risk of revision in credit rating).
Finance Minister Mukherjee has commended the budget without giving further stress on the spending and even didn’t touch the revenue side largely in the wake of the macroeconomic health. Foreign Inflows will continue to drive the Indian economy higher in future but the lower exports will make the Balance of Payments (BOP) uneasy for the economy. The vast current account deficit will make the Indian currency more vulnerable in the near term against the US Dollar however it would be a short term pain and not a major concern to think upon. We’re expecting some bit of reduction in fiscal deficit in FY2009-10 due to diminution in subsidy burden including Oil bonds, food subsidy and we could see the beginning of economic reforms in the fiscal year 2009-10 Budget.
We would discuss more in our next report “Indian Economy in 2009-10 Overview”
Reserve Bank of India modifies its monetary policy. RBI Governor Duvvuri Subbarao has slashed CRR and policy rates several time since he took the charge.
Banks are under significant liquidity pressure and it is evident that the banks are now withdrawing money under the central bank’s Liquidity Adjustment Facility (LAF) or Repurchase Agreement (Repo). Is the RBI cogitating the another rate hike to contain inflation under the compressed liquidity situation? Find out more.
The Reserve Bank of India Headquarters in Mumbai.
On Tuesday Apr 21, 2009, India’s Central bank – Reserve Bank of India has announced its Annual Policy on Macroeconomic and Monetary Developments. RBI has slashed its policy rates by 25 bps. BPS is Basis Points which should be defined by One Hundredth of a one percentage point 1/100th of 1%.
After the reduction in policy rates, RBI’s Repo rate stands at 4.75% and Reverse Repo rate stands at 3.25%. Repo means repurchase agreement in which banks sell government securities to the RBI in exchange for cash and agrees to repurchase those securities from the RBI at a later date which is the Reverse Repo Rate. While addressing to media, RBI Governor stresses that the bank should pass-on the reduction benefits to the consumers. India has witnessed the steep fall in demand for a credit.
RBI Reference Rate As on Apr 2009
Reverse Repo Rate
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Prime Lending Rate (PLR)
The Indian Economy has also got affected by the economic crisis in developed countries. Since mid of Sep 2008, when the major financial institutions were collapsed, the India’s central bank has reduced its policy rates and CRR by number of times and SLR by 100 bps since than to prop the Indian economy up. India’s money supply dropped to 18.4% in compare to 21.7% last year which signifies the deceleration in credit market and the capital inflows. In the last few months, Indian Rupee has depreciated by more than 18% and likely to depreciate further due to higher risk aversion in Rupee denominated assets, acute deleveraging due to falling exports which resulted fall in corporate earnings and strong demand for US Dollar due to huge amount of selling in equity markets. However, since Mar 09, financial markets have performed better in compare to its peers and other developed markets due to attracting and cheap valuation of the India Incorporated. By taking these factors in mind, RBI is taking precise decision on a periodic basis to respond to the global financial crisis and to make a favorable economic environment. India’s external debt and national debt has reached the level of 49% to the annual gross domestic product, however the strong foreign reserves would ensure the external stability.
This research has been Superannuated by the VMW Research Team. This research might not be applicable in today’s economic context.