The Indian Economy Blog

February 28, 2007

Budget 2007: The Moment Of Truth

Filed under: Business — Nandan Desai @ 9:06 am

(Click here for a live webcast of the FM’s Budget presentation – starting 11AM IST)

(Click here for live intraday SENSEX values)

Here at IEB, you (our faithful readers) can always trust us to get excited about something like the FM’s budget presentation. CNBC’s got the pretty women covering the reactions on the trading floor, old Indian Marxists are dusting off their loafers for that appearance on NDTV, and here at IEB, we libertarians are simply smirking and waiting for the bloodbath.

The circumstances couldn’t be more propitious: markets globally have crashed. China’s down 9%, Bovespa’s down 7%, the NASDAQ is down 4%. Our precious SENSEX – ever resilient to logic – had touched highs in the 14,000s, and has already come down a bit. Today, however, is a new day, and we’re about to see some fireworks.

In the next few hours, the Finance Minister will deliver the budget for the coming fiscal year. India has already been testing new (economic) limits, as we have documented on this blog – and, the FM’s address will come at a time when confidence in the committment to reforms is waning, and onion prices are starting to make people worry. Just for good measure, the Goddess Laxmi has thrown in three more obstacles: crashing global stockmarkets, a recession warning from Alan Greenspan, and sustantial electoral losses for the Congress Party in the state assemblies.

So the burning question is: will he make it worse, or help us (investors) out?

People worldwide already have the selling impulse coursing through their veins, so it would be unfair to lay blame for the market bloodbath which is sure to come, squarely at the FM’s feet. Nevertheless, one must ask: is he aware?

Does he realize that India has to keep reforming in order to open up supply-side constraints? And that the need for reform has increased, not dimished?

Does he acknowledge the need for the independence of the Central Bank? Because short term constraints have to be addressed through adept demand-management?

Most of all: does he realize how much is riding on this? This is not just about the markets and the billions of wealth which is likely to be wiped off (and probably, just as speedily, recreated). It is about reforming a broken system.

India’s population, its private sector, and its civil society have emerged; but the government has thus far lagged behind -thereby constraining the others. The moment today is about understanding how the aspirations of Indians have changed and the bar could not be set higher.

Remarkably, about 16 years ago, another man stood at a similar precipice of [economic] history and chose to follow his dreams and what he knew to be right, rather than what he thought was most expedient.

Will this Finance Minister follow in those footsteps? Will this be the “Dream Budget”?

If he doesn’t or if it isn’t, trust me: Sell.

(Click on the embedded links above for good Budget Day reads)

1 Comment »

  1. How can he do something spectacular.He cannot give any incentives
    because govt is running fiscal deficit.He cannot control inflation
    because money supply is growing at 20%.Trouble all along

    Comment by Satish — February 28, 2007 @ 9:51 am

  2. I think it’s about more than social spending and even inflation. It’s about earning a certain measure of policy credibility. He could do this by clearly stating the need to reform some of the “no-go” areas like labor laws, financial sector, retail etc.

    Comment by Nanubhai — February 28, 2007 @ 9:58 am

  3. Social sector spending needs to be increase along with spending in \’priority\’ sectors.

    Comment by Alex M Thomas — February 28, 2007 @ 10:17 am

  4. Thanks Alex. I\’m sure we\’ll see something along those lines today.

    Update one: he\’s talking about infrastructure upgrades. Futures markets in wheat and oil to open today (see this recent IEB post from Nitin)

    Comment by Nanubhai — February 28, 2007 @ 10:20 am

  5. Market update: SENSEX was down 335 points (-2.5% at the start). It\’s at -1.98% (-266 pts)15 minutes in – the aggregate budget numbers are already out… hmmm.

    update 2: dammit, he started talking about NREGS… the fall begins again.

    source is bloomberg marketdata.

    Comment by Nanubhai — February 28, 2007 @ 10:49 am

  6. Sweeping tariff cuts… The speaker is saying \”You don\’t like cats and dogs?\” when the FM announces cuts in pet food duties.

    Baba paan masala to pay more excise duty; Chutki (tobacco-free) to pay less.

    Comment by Nanubhai — February 28, 2007 @ 11:51 am

  7. It’s good that the government is trying to cool down the heated stock market.

    On the other hand, all those sops are going to cause inflation.

    But they will definitely keep the feel-good factor alive and the economy running.

    Good moves with little tinkering.

    PS: Come on, don’t delete my posts haha

    Comment by yum yum — February 28, 2007 @ 5:19 pm

  8. I am worried about this government. On one hand they are concerned about agriculture. They want to make it the priority sector and it actually is a priority sector politically. But on the other hand, they take farmer unfriendly measures like banning futures. Futures are actually the best method for price discovery and should be expanded and allowed to trade in large quantity.

    Comment by rishi — February 28, 2007 @ 11:22 pm

  9. God save India! A total letdown budget…. Was he the same person who delivered the budget in 1997? How come 97 excites everybody and 2007 dissapoints everybody?

    Comment by Balaji Viswanathan — March 1, 2007 @ 12:38 pm

  10. Some thoughts about the budget and other emerging problems…

    Except for the sharp y/y% hike in spending in education (+30%), and infrastructure (just under 30%) the budget was fairly un-exciting. Some hikes on capital gains and IT companies shouldn’t really antagonize the corp sector much or do lasting damage to their share prices, as it pales in comparison to the multi-year secular trend of tax rate cuts (which have fostered a broadening of the tax base). Also reductions in customs and duties on K goods could also -at the margin- help inflation fundamentals while ensuring a stable rate of -much needed- capital formation.

    Before I try assess (if not proscribe) what else Chidambaram should’ve, or could’ve, tried to do, let me just briefly focus on some external account issues that has been getting surprisingly little coverage. While it is all well & dandy to encourage cheaper imports of K goods and all, the deterioration in the merchandise trade balance is now becoming a worrying trend with imports expanding –y/y- at 20% to 27% for the past 4-5 months now, while export growth has slipped to below 10%. Consequently, the merch trade deficit is now running at a monthly avg. of $5.5Bln to $6.0Bln (up from $3Bln to $5Bln a year ago); on an annualized basis that comes to $66 to $72Bln, or an 8% of GDP CA deficit – highest ever in a v.long time, and worsening sequentially for the 4th year in a row. If net services receipts (IT exports, outsourcing revenues, etc.) cover half of the merch trade deficit ($33-36Bln), and NRI inflows amount to another $25 Bln or so, India still needs another $10 to $15Bln in foreign financing. Doesn’t sound like an insurmountable amount at all. But when you account for all the foreign acquisitions that Indian companies are making or are about to make, net FDI inflows is going to be barely $3-$4Bln, thereby leaving the remainder of the financing (approx $10-12Bln) squarely on two last remaining sources: equity inflows, and new external borrowing. Frankly, equity inflows (including into real-estate, etc) could be far more unreliable this year, at least relative to the past 2 years, due to 3 important reasons: i) Notwithstanding LT potential of the Indian economy and all, Indian markets’ P/E (w/trailing earnings) are already regarded as excessively rich +offering fairly low div. ylds, to comparable EMs; and ii) Fwd earnings potential of the Indian corp sector could be capped by further RBI tightening and –this is key- their revenues could also face headwinds, going forward, from increasing domestic competition + the business challenge inherent in the (Indian corporate-sector wide) strategy shift from high margin but low (domestic) volume-base to a lower margin but broader (globalised) base amidst a slowing global economy; and lastly iii) As you may have noted from the events of the last few days, volatility in global equity markets is back. So, in all, while global (JPY funded) carry is still on, and India’s vaunted growth potential is still there, given the deterioration in trade trends (along with an ongoing worsening of inflation + high & sticky wage growth) the margin for policy error is getting thinner and thinner. What do I mean by error? By error, here, I am referring to the fact that a sharp slowdown in net equity inflows (let alone sell-offs of by FIIs of existing holdings of Indian equities) could lead to some BoP volatility. And that in turn, by weakening the Rupee, could –at the least- complicate the Reserve Bank’s ongoing efforts to squelch inflation.

    So, having worried, enough about the global environment and the inflation risks it poses to India, let me just turn very briefly to the broader thrust of the budget numbers. In fiscal year (FY) 06-07 (which will end in March 31) the Indian economy will have grown by around 9%, y/y (at least 2% more growth than when FRBM was instituted around FY03), with overall revenue expansion of 27% (target revenue growth was 16%), expenditure expansion of roughly 16% (target was 12%), and central-govt- budget deficit will probably come down to 3.7% of GDP. This is a 0.8% of GDP improvement from last fiscal’s 4.5% of GDP deficit and just within the FRBM target of 3.8% of GDP . OK so far so good. Now the FY07-08 budget has assumed another year of 8.5-9% GDP growth, but revenues & expenditures are targeted to grow only by, respectively 17% and 10% to take the overall central govt. deficit down to 3.3% of GDP in 2008. Once again just within FRBM targets. My concern is that if real growth is once again 9%, why not aim for a more aggressive pace of revenue growth over expenditure growth? And why not aim for an even narrower fiscal deficit. I mean why not another reduction of the central govt deficit by 0.8% of GDP and why just 0.5%? Not only that, but the off-budget subsidies (oil-pool deficit) remains as large (1% to 2% of GDP) as ever. No attempt has been made to consolidate this funding need as a budget item. As a result, I believe there still remains a pro-cyclical bias in the budget. Or call it fiscal accommodation by ‘stealth’. Consequently, all of Chidambaram’s professed concern about inflation and all remains, IMO, just lip-service. There is no reform in this budget. Not even a marginal amount of rationalizing, let alone an outright downsizing of the size of government. Yes there are more sops for the poor and the needy, and fewer sops for corporates and big business, but –frankly- the biggest tax break for the poor would be lower inflation. And this is where Chidambaram has probably failed. I say “probably” as the only hope for fiscal redemption, now, lies in the manner of execution of the budget. It is all well and fine to have fiscal targets, but how well you stick to them (or over/under perform) is going to be key.

    In the meanwhile, the RBI will single-handedly have to bear the cross of inflation-reduction – after having waited a bit too long amidst all the debate from all quarters (& especially the MoF) about the “about to happen… productivity miracle” and the “about to happen… savings & investment boom.” And the Indian markets are going to be anything but a one-way bet this year.

    Comment by ASMitra — March 2, 2007 @ 9:46 am

  11. So much for India being blessed with the Economic “dream team”.

    Comment by Anuj — March 2, 2007 @ 9:34 pm

  12. “…on an annualized basis that comes to $66 to $72Bln, or an 8% of GDP CA deficit – highest ever in a v.long time”

    Sorry… the 8% of GDP deficit refers to the trade deficit, not the current account deficit. My mistake.

    Comment by ASMitra — March 2, 2007 @ 10:07 pm

  13. this article by a Bloomberg columnist seems to make a good argument against banning of futures trading in wheat and rice futures

    http://www.bloomberg.com/apps/news?pid=20601039&sid=apm.ICwxSAuQ&refer=home

    Comment by Deepak Jois — March 6, 2007 @ 12:56 pm

  14. This year’s budget is more or less a continuing deception from previous ones. The media is portraying it as Chidambaram’s succumbing to Sonia Gandhi’s or Left parties’ diktats. Notwithstanding the fact that those diktats were unwarranted and unnecessary, it is my sense that those diktats were anyway not anti-rich or anti-development as many in the media tend to portray. Last three years has seen the economy grow at a fast pace but the same steep rate of growth is not reflected in the revenue collection figures disclosed in the budget.

    Many commentators in the media crib about subsidies to rural sector without highlighting the fact most of these subsidies end up accruing to chemical-based fertiliser and pesticide companies whose products have significantly polluted the fertile lands of rural India, or end up being eaten by government IAS-ICS agents.

    The media also chooses to suppress the fact that vast subsidies are given to the affluent or already better-off sections in the form of: tax exemptions to large-sized IT (technology) companies making superlative profits (the 12% minimum alternate tax on IT companies introduced in this budget is a welcome measure but not enough as it is still a lot lower than the 33% tax paid by other companies); tax exemptions to SEZs; heavily-subsidised diesel that today is consumed more by private SUVs and swanky cars running on diesel engines than transportation of goods by trucks across the country; heavy slashing of customs-&-excise duty rates on non-essential products like jewellery, plastics, processed food, aerated beverage drinks like colas; and so on.

    Huge and unprecedented increase of Rs 40,000 crore for defense expenditure outlay (taking the total to Rs 96,000 crore) without transparently laying down before the nation a detailed rationale behind it, is another glaring point that the media has chosen not to question adequately. The Tehelka expose of corruption among our defence forces and the ministry of defence is not forgotten by some of us.

    I pray that it is not too late before our country, its ecology and its majority non-affluent population get completely devastated by corporate entities and their sophisticated political goons like Chidambarams, Montek Singh Ahluwalias, Manmohan Singhs, Mulayam Yadavs, Buddhadeb Bhattacharjees, Bal Thackerays and Arun Jaitleys, aided and abetted by a ‘deliberately-looking-the-other-way’ media and a ‘consumption-obsessed’ urban citizenry.

    Comment by Rajesh Gajra — March 7, 2007 @ 1:35 am

  15. Guys – this is just plain ridiculous. I have been tracking this site thinking I will see an incisive analysis on the Budget but what’s up with you guys?

    Its been a week since the budget and not a single peep out of the prophets on economy! Shame!

    Comment by Anil — March 7, 2007 @ 5:32 pm

  16. Are we going back to licence raj again? Today commerce minister Kamalnath says that if will ban exports if cement companies are not willing to take extra tax burden. He is intended to do the same thing, what he did with the sugar companies three months back.

    The question is – Is it necessary to ban exports to bring down the prices? Will it help economy any good?

    Comment by Brijesh Padalia — March 7, 2007 @ 9:42 pm

  17. I think the FM is squeezing more tax from a small base to fund harebrained schemes. This budget is a classic example of politics winning over economics. How can you raise taxes and claim it can control inflation. The next thing you know he might put service tax on the air you breathe

    Comment by Dev — March 8, 2007 @ 11:25 am

  18. I think finance minister has lost a oppertunity to develope the Indian economy. Because it a very good oppertunity.And another thing the inflation can not be controlled only by raising the taxes.

    Comment by deba — March 11, 2007 @ 11:24 pm

  19. Why is everyone talking an cribbing about the FM. India is for sale and our FM & PM are only speeding the process, Iam very happy let us do it fast. The sooner the sale is completed, it is better, we can merge faster with USA and become part of their country.
    East India Company can be replaced by American Corporation, It just took us 65 years for us to realise that.

    Comment by Rajesh — April 7, 2007 @ 3:35 am

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