A week on from the release of the 2010-11 Indian budget, the country seems to have survived any test of confidence in the country’s prospects with the usual collection of bears, worriers, etc more focused on the tribulations of Greece than India.
Central to this acceptance was the government commitment to cutting its budget deficit over the next two years, while maintaining a fairly tight hold on spending.
At the same time its committed to quickening the pace of economic growth to more than 9% in the coming year, a bull point for Australian companies investing in India, such as Woolworths and the ANZ Bank.
The government is aiming to wind back some of its stimulus spending (and the Reserve Bank of India will add its own bit soon with an interest rate rise, according to commentators in Mumbai).
But some spending plans will remain in place.
The government aims to cut its budget deficit to 5.5% of gross domestic product for the year that starts April 1 – against the 6.9% estimate for the 2010 year.
A further cut to 4.8% of GDP the following year, was also revealed in the budget.
Growth is projected to rise to around 8.5% next financial year from an estimated 6.9% for the year ending March 31.
Growth fell to 6% (annualised) in the third quarter thanks to weaker agricultural output.
But the government is planning to boost spending 8% in the new financial year to a total of 11.08 trillion rupees (around $US280 billion) and there’s some scepticism the budget cuts can be achieved.
Government borrowing has been set at 4.57 trillion rupees ($US100 billion) against this year’s record 4.51 trillion rupees.
While the borrowing and spending remains flexible and controllable with a bit of political will and guts, inflation remains something that India still has trouble controlling.
It has been a major concern for the government and the central bank, thanks in part to the failure of last year’s monsoon.
A return of the rains later this year will go a long way to cutting a lot of momentum from price pressures in the closing months of 2010.
India’s headline inflation rate rose to 8.56% in January from a year earlier, while wholesale food prices rose 17.58% (in the week ended February 13) with food prices leading the way.
An immediate worry for inflation is the impact of the budget measure to increase fuel taxes.
The move to levy an excise duty of one rupee per litre on petrol and diesel has already led to a hike in fuel prices, which will add to price pressures.
The bottom line of the change was that the government raised the price of petrol 6%, and diesel by about 8%.
"Inflation is likely to increase at the faster pace from here on, due to higher fuel prices and higher disposable income (due to the tax reliefs) as indicated in the budget FY11," according to Mumbai-based broker, Khandwala Securities.
"We expect inflation to touch around 10% by next month and remain in double digits for few months."
An imponderable is the reform of taxes for individuals and corporates, with the aim to lower tax for both.
The government has yet to explain how it will do this, while managing to keep a lid on spending and cut the deficit.
The tax cuts will have to be balanced by spending cuts (obviously not happening in a budget where outlays are projected to rise 8%) or by higher revenues from tax increases.
Brokers say the rise in fuel taxes could finance a cut in individual and corporate tax.
In his budget speech, Finance Minister Pranab Mukherjee, said the "symptoms of economic recovery are more widespread now.
"The improvement of the economy encourages a course of fiscal correction.”
He set a target for India of becoming the world’s fastest-growing economy within four years, surpassing China.
He told the Financial Times overnight that India can reach its goal of 10% annual economic growth even if the Congress party-led government fails to implement pressing structural reform.
He told the paper that the lack of a parliamentary majority for the Congress party was an obstacle to moves such as raising the cap on foreign investment in the pension and insurance sectors and steps to improve governance.
“We will be going [to 10 per cent] because of the steps which we have taken,” Mr Mukherjee told the FT.
India’s annual Economic Survey (prepared by officials advising Mukherjee) was released a day before the budget was delivered and said “it is entirely possible for India to move into the rarified domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years”.
India has averaged GDP growth of 7% over the decade ending last December, against China’s 9.1%.
The report said India’s $US1.2 trillion economy may “breach” a 9% growth pace by March 2012.
