India Budget 2009 Review. Market Expectations Despaired.

 

 

GDP Growth

IIP Data

Budget for an Inclusive Growth

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.

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”

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(SA) Interim Budget 2009 Review: Fiscal Deficit Swells to 8% to the GDP.

Please Read the latest report on India Budget 2009.
India’s Fiscal Deficit swells to 8 per cent of the annual gross domestic product, govt spending likely to rise and tax rate cut are less likely. However, Govt has reduced Excise Duty and Service Tax to shore-up the economy.
 
 
Pranab Mukherjee

India's External Affairs Minister (Foreign Minister)

 

Then Minister of External Affairs – Mr Pranab Mukherjee, who was in charge for Finance Ministry also for a while, has announced the Pre-Election Interim Budget 2009 for the Fiscal 2009-10. Markets and the corporate world has anticipated lot of changes and reframing of policies to weather the current global economic downturn however, the Interim Budget has banished all the factors to support the Indian economy. Interestingly, he has pointed out that the major policy announcement would take place post election in the Regular announcement of the General Budget which was held in May, 2009. 

In his budget speech, he merely stressed upon the Rural Development by expanding the Rural Infrastructure Development Fund (RIDF) from Rs. 5,500 Crores ($1.13 Billion) for the year 2003-04 to Rs. 14,000 Crores ($2.87 Billion) for the year 2008-09. Apart from that, he has discussed, exactly what the UPA Govt have did in the last 5 years of their tenure. On the most important Financial and Tax reforms front, he has left this portion for the Regular Budget announcement. He said the, tax rates must fall in these stressful economic times, while the majority of industry has expected positive changes on the tax front and the ailing Real Estate and Infrastructure sectors had anticipated for support from the Government. Now, the RBI is the final ray of hope until the General Elections in a way of reduction in policy rates by at least 100 bps. 

India’s Finances 

Since the last Year’s Budget announcement, the Indian Govt’s finances have totally shaken up. Three major developments like provision for pay revision (Sixth Pay Commission), loan waiver and finally National Rural Employment Guarantee Act (NREGA) and various other subsidies has led to significant intensification of the India’s Fiscal Deficit. Initially, Govt had pegged it at 2.1% of the India’s GDP. This Fiscal Deficit has to be rise for sure as the Govt has announced two different Stimulus Packages in the last couple of months to stimulate the economy and the domestic demand, extra spending under NREGA, Subsidy on Oil and Fertilisers and most importantly the lower revenue/receipt from Taxes. Government is also expecting lower tax revenue in this fiscal year due to global economic downturn. The abstract of “Demand for Grant” is given below:  

  • Pay & Pension Revision: Rs. 28,505 Crores ($5.85 Billion)
  • Oil Subsidy (Oil Bonds): Rs. 65,942 Crores ($13.54 Billion)
  • Fertilizer Subsidy (incl Bonds): Rs. 64,866 Crores ($13.32 Billion)
  • Food Subsidy: Rs. 11471 Crores ($2.36 Billion)
  • NREGA: Rs. 25,000 Crores ($5.13 Billion)
  • Farmer’s Debt Relief: Rs. 15,000 Crores($3.08 Billion)
  • Transfer to States: Rs. 12,741 Crores ($2.61 Billion)

The total cost of those subsidies (including bonds) and other packages is Rs. 223,525 Crores ($45.9 Billion) which means, the it works out to 4.4% of the India’s GDP. If the Govt adds the reduction in tax collections, it could cost 1 per cent of GDP. According to the Economic Advisory Council (EAC), the Fiscal Deficit in the Union Budget had been placed at 2.5% to which, the addition of 4.4% and 1% to this number would definitely raise the total to nearly 8% of the GDP. Credit Rating agencies like Standard & Poor’s (S&P), Moody’s and Fitch are closely watching the India’s fiscal shortfall and this would definitely force them to downgrade the India’s Sovereign Debt rating. On Tue, Feb 24, 2009 S&P has reaffirmed the India’s rating to BBB-, means downgrading India from “Stable” to “Negative” outlook. 

What would happen, if the Fiscal Deficit rises? It means, that the Government will borrow extra to finance their expenditures (planned or non-planned). We won’t evade the higher monetary inflation. If the Government borrows extra for its spending, then the level of money supply will rise because it will force the Reserve Bank of India (RBI) to print more money – which would lead to the higher inflation at least in the medium term. Currently, the India’s national debt is 59% of the annual gross domestic product (Central and State Government combined). At VMW, we have earlier discussed about the deflation in the Developed Economy, however we’ve ruled out the Headline Deflation in India. Maybe the short term, Government borrowing will prevent the further fall in inflation. There is also a possibility of higher interest rates in the long run. 

As a result, there is a limited room for the Government to ramp up the spending without causing the structural harm to the economy. That’s why the Government is reluctant to cut tax rates and in the near future, Government may also consider reducing subsidy burden on Oil and Fertiliser by 1.6% of the GDP and this Interim Budget proves merely a performance review of the Government. 

Please Note: All figures in US Dollar (USD) terms are converted at Indian Rupee (INR) 48.70 aganist the USD. 

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