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BW Businessworld

In Need Of An Action Plan

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The relevance of the budget has been on the decline with every passing year as a lot of policy measures/announcements happen throughout the year. In fact, in a world that changes every day, an annual budget is an anachronism. 

Having said that, Budget 2012 has a clear directional drift towards controlling our subsidies and hence our deficit. Any real movement in that direction has huge positive implications for our credit rating and foreign investment, and hence
our markets.

With few options in terms of containing the fiscal deficit, the finance minister had to resort to an increase in taxes on goods and services. Coming at a time when industry is reeling under the impact of high interest rates, this will further dent margins of companies. For industries that are able to pass on this cost, it will lead to cost-side inflation pressures.

The other big challenge from an inflationary perspective is the whole aspect of reining in subsidies at 2 per cent of the GDP. With oil prices ominously lurking beyond danger levels, the only way to fulfil the objective of containing subsidies is to pass on the impact to consumers thereby further aggravating inflation.

The third aspect is that infrastructure spending and capital formation as envisaged in the budget is to be increasingly met through borrowings — both domestic borrowings through bonds and external borrowings through external commercial borrowings (ECBs). While this is a welcome step in the medium term for the infrastructure industry that is currently starved of capital, in the short term this will again result in the crowding out of private sector and resultant inflation. High oil prices and increasing external borrowings will also put pressure on the currency.

In this context the monetary easing that one expected from the Reserve Bank of India will have to take a back seat at least for the short term.

The budget made some creative attempts to help improve capital availability in both equity and debt markets. However, the equity market-related changes (STT reduction and Rajiv Gandhi Equity Scheme) are unlikely to have any significant impact on the equity markets. Effectiveness of a proposal like the Rajiv Gandhi Equity Scheme will depend a lot on implementation and credible fund management (in private sector as well as PSU). Large disinvestment targets are likely to keep liquidity tight in the equity markets, keeping up pressure on the liquidity of non-government entities. ECB relaxation for low-cost housing, airlines, infrastructure, etc, is likely to benefit some of the industries and have stock-specific impact.

The budget overall fails to address the growth conundrum. We have already delivered way below our targets on growth last year. Unfortunately, the growth issues are not a budget exercise, but a more comprehensive revamp of our policy frameworks. Overall, global investors in public markets have already become slightly indifferent towards budget as a "policy signalling event", and this budget has reinforced that. Given that, it is unlikely markets will have any significant movement on either side due to the budget. Markets are likely to play a "waiting game" now, and see what kind of follow-through happens over the next couple of months.

What is required now is a performance in the coming year that "exceeds expectations" on both deficit and growth front. I sincerely hope that we will go beyond a CFO's presentation to a definitive CEO action plan that delivers despite the global markets. Keeping fingers crossed!

(This story was published in Businessworld Issue Dated 26-03-2012)