Will the Govt. achieve the new set of targets?

Oct 30, 2012

In this issue:
» FDI takes a hit in the US
» RBI keeps rates unchanged
» Billions moved out of the country by China
» Hotels to get infra status
» ...and more!


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Ever since donning the mantle of FM, Mr Chidambaram has been on a mission to obliterate the 'paralytic' label branded on the government. First were a slew of reforms announced which had been sitting on the back burner for quite some time. Now the Finance Minister is intent on bringing the fiscal deficit down so that the Reserve Bank of India (RBI) is pushed to cut rates.

So what has been proposed by the FM on the fiscal front? The government intends to achieve a fiscal deficit target of 5.3% (this is lower than market expectations of around 6%) for FY13. Not just that, the FM has outlined a roadmap for the next three years. Thus, the deficit target is expected to progressively reduce to 3% by FY17.

The intent of the government to bring the deficit down is certainly a step in the right direction. But what is important is how it proposes to do the same. Indeed, the target of 5.3% seems like quite a tall order given the mounting subsidy bill; something which the government has not shown much inclination to reduce. The FM is banking on disinvestment, spectrum allocation and tax receipts to bridge the gap. Further, it has also proposed going in for expenditure cuts. So if the subsidies are not likely to be toned down, then it would not be surprising if cuts largely take place for productive expenditure. This is hardly an encouraging sign.

The food subsidy bill is one of the cases in point. Although it has been touted as one of the most significant reforms, it has been stalled for the time being. To give you a gist, the program aims to provide subsidised grains to more than 60% of India's population. Moreover, there would be special provisions for pregnant women, destitute children and others. Given that the government's subsidy expenses are on the rise, it is not keen on bringing this into force in FY13 atleast thereby sparing itself added pressure. Meanwhile, no roadmap has been given on how the subsidies on oil and fertilisers are to be brought down.

The RBI has not batted an eyelid and has kept the rates unchanged. So once again the ball is in the government's court. All eyes will be on the current government to see how it manages to achieve its targets? More importantly, while these are targets for the next 3 years, if a different government does come into power in the general elections, will these targets be set aside? These are the points to consider.

Do you think that the government will be able to achieve the targets set for reducing fiscal deficit in the coming years? Please share your views with us or post your views on our Facebook page / Google+ page

 Chart of the day
As the global economy has taken a hit, its impact has been felt on foreign direct investment (FDI) flows as well. Indeed, most economies have seen FDI inflows reduce during the first half of 2012 as compared to the same period last year. Today's chart of the day shows that the US has seen the biggest fall in FDI inflows in the year so far. This is hardly surprisingly given that recovery, if any, in the US has been mediocre at best. Meanwhile, most of this foreign money has been finding its way into emerging markets, which despite the slowdown, are growing faster than their developed counterparts.

Data Source: The Economist

Trust the RBI to do what it does best. Stick to its convictions. In Monetary Policy review today, governor Dr Subbarao did little to bow down to the government demand of lowering interest rates. The 0.25% cut in cash reserve ratio (CRR), however, will free up liquidity to the tune of Rs 175 bn. Readers would recall that some top banking sector executives had complained about the unproductivity of the CRR. Especially because the same is non interest yielding for banks. Plus it blocked essential liquidity for the banking system at a time when the sector is targeting to lend at cheaper rates. More so to pump prime corporate capex and investment in key infrastructure.

While yielding to the need for additional liquidity, the RBI has not lost sight of sticky inflation. Fuel prices in particular remain on the RBI's radar. And the central bank sees little reason to go easy on inflation control.

The government's latest fiscal consolidation plan too has clearly not impressed the RBI. With a shoddy track record in bringing down deficits, the RBI is unwilling to by the government's 'paper targets'.

What do you think happens if you wipe out a free market? If the evidence around the world is any indication, it does nothing but creates a black market. And the People's Republic of China too does not seem immune to this phenomenon. There are tales galore of how hundreds of millions of savers are exploited in the country by offering them very low rates on their deposits. There are also numerous stories about entrepreneurs being made scapegoats to fulfil the dreams of state owned enterprises. Naturally then, the local Chinese out there are feeling compelled to move their hard earned money out of the dragon nation and that too by illicit means.

As per firstpost.com, Chinese investors have evaded Government controls to move more than US$ 600 bn out of the country last year. To make matters worse, the trend is only increasing year after year. This is certainly not a good sign for an economy where capital requirements are huge. Besides, since the outflows also lead to tax evasion, they do no good to the rising rich poor disparity in the country. Easing controls and deregulation of the financial sector could no doubt stem the rot. But whether the Chinese Government is up to it is what remains to be seen.

The hotel industry in India is facing a slowdown. Financial year 2012-13 has started on a weak note. Revenue per available room (RevPARs) shrank by 5-8% during the first quarter, hurt by declining room and occupancy rates. The current down cycle in the Indian hotels industry has been longer than anticipated. While the global economic uncertainty continues to hamper demand growth, supply additions in several markets is impacting the industry's ability to hike tariffs.

But some good news might be coming towards the industry. More hotel categories are likely to get infrastructure status. Once this is done, then top-grade hotels will be eligible for long-term loans of 10-15 years duration. Banks normally give term loans of 6-7 year duration for hotel projects, which are in the three-star and above category. Now banks will be inclined to lend more to the hospitality sector as three-star and above category hotels located within cities with population of more than 1 million. The government is considering tweaking the definition of infrastructure pertaining to hotels. This will benefit the industry in the long run.

Consumer Confidence Index (CCI) is a key lead indicator of economic activity in the country. It reflects the degree of optimism or pessimism that consumers have for the economy. Increased spending reflects optimism and vice versa. The good news is that the global consumer confidence index rose by one point to 92 in the third quarter. The improvement in the third quarter was driven by positive signs in US. However, a reading of below 100 signifies that overall the consumers are still pessimistic.

The story is different in the emerging markets. Consumer confidence is gaining momentum there. In fact, it is strongest in India and Indonesia. Recent policy actions in India have given the necessary boost to it. However, for the global index to rise above 100, environment in the Euro Zone economies must improve. Apart from policy moves, resolving the unemployment issues can help do the same.

The Indian equity markets fell into the red after RBI's monetary policy announcement. At the time of writing, BSE Sensex was down by 144 points (0.8%). Barring IT stocks, all sectoral indices witnessed losses. Asian stock markets traded mixed with Taiwan as the top gainer and Japan as the top loser.

 Today's Investing Mantra
"The extravagance of any corporate office is directly proportional to management's reluctance toward shareholders" - Peter Lynch

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4 Responses to "Will the Govt. achieve the new set of targets?"

Sundar Rangan

Oct 31, 2012

I was amused to read today's newspaper where Chidambaram is said to have berated RBI governor for not lowering interest rates. Chidambaram is perhaps forgetting that his govt.'s track record in fiscal management has been so sloppy that no one can take its assurances seriously. The roadmap to 2017 is only a mirage considering that UPA govt. has consistently brandished mere populist policies ever since it unseated the more fiscally-sane NDA govt.in 2004. So hats off to Subba Rao for standing his ground.

Like (1)

R. Verma

Oct 30, 2012

In the item "2:47" the "Peoples' Republic of China" has wrongly been called "Republic of China" which is the official name of Taiwan. Mainland China is either simply called "China" or "Peoples' Republic of China" or "PRC".

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Oct 30, 2012

With all humility fortified with ignorance in abundance I am prompted to observe as under:
There are 3 factors on which my observations revolve around/focussed on :
Government's Roadmap for next 3 years ?
The expenditure cuts envisaged?
The deficit targets ?

The intent(to eventually reduce the deficit to 3% by 2017 though noble ) the means should justify the ends ??) this prompts one to cite the adage "YOU CERTAINLY FAST TODAY for an UNCERTAIN FEAST TOMORROW ??

The cuts envisaged should not belong to the category of developmental expenditure
which ensures growth ??

How far and how long would the deficit targets envisioned are likely to be achieved ??

I am not an economist .
All these come from the ordinary common man's common sense

Like (1)


Oct 30, 2012

Is this gimmick not just the same old wine in a pretend new bottle?( rather the same old spurious hooch in a recycled bottle??)
Come election clouds/fever and the gimmick tape in re-run. Even the so called FSB. What is the delivery mechanism?? What is the PDS and ration/BPL schemes et all?? So one more scheme on paper!
There is no dearth of schemes. There is a dearth of honest committed delivery mechanism, accountability.

It would be interesting to know how the pregnant women subsidy will be implemented. A new batch of ""ration docs"" will be recruited?? Seems like a joke.

As long as subsidies are there and the real cost of items are not accepted then its a design for failure. 60 odd years of this nonsense should have opened everyone's eyes. The poor, disadvantaged etc should be taken care of by effective and accountable delivery system of food etc to them. Not thru conduits that feed back to politicians accounts.

The immediate FD can be mitigated to a significant extent if the nations money stashed away in SWISS and other banks held by people incl them political bosses and their parties are brought back. Does anyone have the courage to do this??Cong/BJP etc ?/No way. Shed crock tears for the poor Indian and come up with more schemes to make him poorer ( and the SWISS GDP to improve?)

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