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

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

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.

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

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

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.