Can FM do a balancing act? - Views on News from Equitymaster

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Can FM do a balancing act?

Feb 16, 2009

From about the middle of January each year, the people, regardless of their stature or knowledge, get caught in the whirlpool of anxiety about the 'possible' announcements of the Finance Minister (FM) in the impending budget, which is generally released only at the end of February. During this period, a flurry of guesses, both educated and uneducated, are made. Even a small remark of the FM is dissected and analysed threadbare by the pundits and finally blown out of all proportions.

Then follows a stream of advises as to what should be included and what not. All this while, the stock markets, the barometer of the economy and policy making (in some ways), add a measure of nervousness to the already 'feared' atmosphere.

This year is it any different? The stock market reaction have already been blown out of proportion in terms of nervousness. We do not have a full-time FM at the helm, and he is not likely to announce a speck of reform measures, for two reasons. Whatever he proposes will not really mean much as his government faces elections in a few months. As such, there will be haze surrounding who will implement any proposals. Secondly, and most importantly, as we said that this is an election-year budget, it will be safe to assume that reforms will take a backseat as populism will drive the show.

Anyway, Indian companies are still wishing the FM to announce certain reform measures that help the economy in these times of turmoil. At an event organised by ET Now, an upcoming business channel from The Economic Times, A.M. Naik, the chief of engineering major L&T said, "I expect the government will take immediate steps to revive industrial production as factory production has fallen into negative territory in December. One way to do that is to salvage public-private partnership infrastructure projects by giving tax breaks to private companies. This way, we can ensure employment to people who lost their jobs due to delay in completion of projects."

Representing the pharma sector, Dilip Sanghvi, the Chairman & Managing Director of Sun Pharma opined, "There is still no clear long-term policy in India for pharmaceutical research and development. We have many engineers and chemists but no jobs. We need to create appropriate jobs for them by having a clear long-term strategy on R&D."

Now the question that arises is whether the government has adequate resources to fulfill the wishes of India Inc. Wasteful subsides, a huge farm loan waiver and fiscal stimulus packages have already taken a severe toll on the government finances. And this is without considering the 'below the line' or off-balance sheet items like oil and fertilizer bonds!

Given this, Bloomberg reports that the FM may unveil its biggest budget deficit in 18 years. The fiscal deficit (the excess of spending through borrowings over income) is expected to widen to 6.5% of gross domestic product (GDP) for the current fiscal, as against the 2.5% target set out in the last budget announced in February 2008. Add to this the oil and fertilizer bonds, and the deficit is over 8%!

This widening gap in government's finances has already prompted several agencies to lower their ratings of India's credit worthiness, which has spooked foreign investors who were already panicky given the worldwide economic crisis.

Overall, the FM will go ahead with today's budget with least amount of expectations from India Inc. and the aam aadmi. As he tries to balance the demands for more fiscal stimulus for a slowing economy with the limited mandate of an outgoing government, we wish him good luck.

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