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FM stays on board the 'long term' ship! - Views on News from Equitymaster
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  • Feb 28, 2011

    FM stays on board the 'long term' ship!

    The Union Budget is without doubt the most watched parliamentary event in the country. Have you ever wondered why? Of course, it gives us an idea of our consumption and investment patterns for the forthcoming fiscal. But besides that, it gives us some sort of sadistic pleasure. The pleasure of finding the most powerful CFO in the country in a tangle!

    Every year, the Finance Minister (FM) has to juggle between the short-term political compulsions of his party and the long term prospects of the country's economy.

    Needless to say, the FM had to do the juggling act this year as well. In our books though, he seemed to have passed the test with some very good grades. If the evidence so far is anything to go by, we are happy that the FM has chosen to stay the course of fiscal prudence and try and make the economy even more resilient from a long-term perspective.

    The biggest concern on the eve of the budget was how the FM would choose to handle the two 'Is' of inflation and investment. Let us now try and answer the specific steps that he has outlined in each of these areas.

    Inflation: As well known, inflation has emerged as the biggest bugbear for the Indian economy in recent times. And two of the biggest factors responsible for the same had been fiscal recklessness and supply side bottlenecks. Thankfully, both these issues have been given the consideration they deserve.

    The biggest positive perhaps has been the target that the Government has set for the fiscal deficit for FY12. The same is expected to come down to an impressive 4.6% of GDP as opposed to 5.1% in FY11. Although the target does look ambitious, this itself can bring about a significant downward pressure on interest rates if achieved.

    We also liked the FM's quite lengthy discourse on improving supply side bottlenecks and also the frequent mention of the use of technology for making subsidies more effective. Thus, with these measures in place and absent any external shocks, inflation does look like getting moderated.

    Investment: Apart from the planned reduction in fiscal deficit, another huge positive from the budget has been the FM's efforts towards procuring more funds for investment, especially into infrastructure.

    He has increased the FII limit of investment in corporate bonds by a significant US$ 20 bn. Besides, the withholding tax that corporates have to pay on interest payments will now attract a lower tax rate of 5% as opposed to 20%. Both these moves are likely to spur foreign investments into the infrastructure sector.

    Indeed, the FM knows it quite too well that in order for the economy to keep growing at 8%-9% in the near to medium term, the consumption story has to be kept intact. Thus, greater allocation towards social sector schemes like NREGA and also more sops to farmers has been provided for.

    Also, on the indirect and direct taxes front, while he has chosen to provide some benefits on the direct taxation front, he has also been sensitive towards the needs of the corporate sector and has not resorted to any significant hikes in excise or corporate tax rates.

    As far as the impact of the budget on the Indian stock markets and earnings prospects of India Inc is concerned, we believe that the FM has indeed provided the ideal road map.

    By announcing to rein in the fiscal deficit and thereby reducing the inflation, he has sent a strong message that he is all for the long term India growth story and does not wish to pursue populist measures just for the sake of it.

    To conclude, we would like to add that India seemed to have firmly established itself on a GDP growth path of 7%-8%. It is certainly not outside the realms of its polity to target a still higher growth rate. But for that to happen, a whole new mindset is required. And if Mr Pranab Mukherjee's past few budgets are anything to go by, we really like the sound of it. It is over to the actual implementation of all the measures now.



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