No stimulus for growth, investment

Even granting that the Finance Minister, Mr Pranab Mukherjee, had limited elbow room in the current political scenario to present a path-breaking Budget, the general expectation was that at least a sincere effort would be made to boost investor confidence which has hit an all-time low. Even on this minimum expectation, the latest Budget has come as a big disappointment to investors — both domestic and foreign.

In his Budget speech, the Finance Minister did emphasise the need to strengthen investment environment and said: “The domestic investment environment has suffered on multiple counts in the past year.

It is time to fast-track policy decisions and ensure on-time implementation of major projects”. However, the Budget fails to address this problem.

In fact, there is nothing in the Budget to push the growth agenda. Expectedly, the industry associations have expressed their disappointment. In fact, the move to amend the Income-Tax Act to retrospectively tax cross-border transactions, apparently prompted by the case involving Vodafone which won the Rs 11,000 crore tax dispute case in Supreme Court, will hit investor sentiment of foreign and domestic investors badly.

GROWTH AGENDA MISSING

Because of the significant decline in the savings rate from the peak of 36.8 per cent of GDP in 2007-08 to an estimated 31.6 per cent in 2011-12, the gross fixed capital formation, signifying investment demand in the economy, is estimated to have fallen to 29.3 per cent in 2011-12, a decline of almost four percentage points over the last four years, which in turn, has resulted in slowing down of economic activity.

Unfortunately, the Budget fails to provide any incentives to increase financial savings and trigger investment activity. The financial savings of households have witnessed a big decline over the last three years, not seen in the preceding seven years, probably due to high inflation rates and the households preferring to invest in physical assets and gold.

Incidentally, the recovery of GDP growth to 8.4 per cent in 2009-10 as well as 2010-11 after dipping to 6.7 per cent in 208-09, the year of the previous global financial and economic crisis, was largely led by consumption growth — both private and government — thanks to the stimulus package offered by the government and enlarged outlays on social sector schemes.

However, sustaining the growth momentum over a longer period is not possible without a pick-up in much-needed investment.

FISCAL SLIPPAGE

The fiscal deficit for the current fiscal has skyrocketed to touch 5.9 per cent of GDP against the budgeted 4.6 per cent because of mounting subsidies and a big shortfall in the disinvestment target. In 2011-12, against a target of Rs 40,000 crore, the government is expected to realise only Rs 14,000 crore through PSU disinvestment.

Surprisingly, the projected fiscal deficit for 2012-13 at 5.1 per cent of GDP is called a return to fiscal consolidation! Even this projected fiscal deficit is likely to be achieved only if the government succeeds in raising the prices of petroleum products and trimming some of the burgeoning subsidies. The petroleum subsidies are budgeted to be lower by a staggering 36 per cent at a time when the international crude prices are on the rise.

On the rising overall subsidy bill, all we have is a promise to restrict it to 2 per cent of GDP against 2.5 per cent in the current fiscal, which is still a whopping Rs 2 lakh crore and could go up further by a substantial margin if the proposed Food Security Bill is passed.

The gross borrowings of the government from the market are pegged at a record Rs 570,000 crore in 2012-13, higher than the current fiscal's Rs 510,000 crore. The net borrowings will be Rs 479,000 crore, higher than the current fiscal's Rs 435,000 crore.

Hence, it is rather surprising that the Finance Minister has promised to bring down the revenue deficit to 1.8 per cent of GDP next fiscal.

INFLATION WORRY

With large fiscal deficit and resort to heavy borrowings from the market, the headline inflation is expected to remain beyond the RBI's comfort zone.

Moreover, the widening of the service tax net and a hike in service tax and excise duty by two percentage points to 12 per cent as also about 20 per cent increase in rail freight rates across most commodities will push up the prices of all items of daily consumption and services for common citizens.

In its mid-quarterly review released on March 15, the RBI had kept its policy rate unchanged and had said future policy action would be determined by the movement in inflation.

Headline inflation had already increased to 6.95 per cent in February from 6.55 per cent in January. High fiscal deficit and a hike in indirect taxes and freight rates will put more upward pressure on prices.

Hence, the central bank will be in no hurry to cut its policy rate. Consequently, the much-need lowering of interest rates by banks is unlikely to happen in the near future to boost investor confidence.