Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Budget: That's not all! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 8, 2005

    Budget: That's not all!

    While this year's budget has been good on the overall direction that it gives to the economy, the Finance Minister seems to have shirked from some tough measures on the infrastructure front. Specifically for a developing country like ours, to move into the path for higher and sustainable growth, certain key propellers are required. Basically, on the structural side of development, apart from a strong human capital, we require a high level of domestic savings rate, pretty decent FDI (not only Foreign Institutional Investors (FIIs)) inflows and consequently a faster development on the infrastructure front. And this budget, we believe, has failed on all of these accounts. Let us understand them briefly

    Domestic savings: If we are to emulate the Chinese example of rapid growth of the years, a high level of domestic saving rate is a must. Compared to China's near 50%, India's saving rate as a percentage of GDP stays well below the 30% mark (though some economist say that high level of subsidies and low taxes have resulted in higher savings rate in China). And while the current government has indicated that the central government's fiscal deficit for FY05 (4.5%) will be below last year's levels of 4.9%, readers need to understand that this has been made possible through an accounting adjustment whereby some of the central government's borrowings have been categorised as those belonging to the state governments. If one were to consider the combined deficit of the central and the state governments, there has not been any improvement in the situation. And the spending programs that the Finance Minister has announced in the budget makes no clear mention as to where would the revenue come from to fund the proposed investments. Such high deficit levels will then do nothing to boost the national savings rate.

    Foreign direct investment: With a low national savings rate, what the Indian economy requires is a strong inflow on the FDI front, where we have consistently been laggard in the past. For instance, compared to China's US$ 61bn of FDI inflows, India received a mere US$ 3.5 bn in 2004. While there are arguments about the different methods of categorization of foreign inflows by India and China, even if were to take a common method, there seem to be a wide difference. While, off late, there have been some minor initiatives on the FDI front whereby the government has eased the limits for certain sectors like telecom, aviation and insurance, the scale of inflows is still lacking. And we believe that this is more on account of the structural problems like a corrupt administration and slow judicial process that has limited the flow of foreign capital into the country.

    Infrastructure development: This area has received the least consideration in this year's budget. While India requires around 10% of GDP (around US$ 56 bn) spent every year towards infrastructure development, the budget has committed a mere $5.1 billion, towards infrastructure development in areas like telecom, roads, power, housing and urban renewal. Out oft this, around US$ 2.3 bn is likely to be financed through an SPV that will be backed by the foreign exchange reserves.

    In a recent interaction with us, Ajit Dayal, Chairman of Quantum Advisors, mentioned, "...we are going to be spending 10% of our GDP on infrastructure and instead of that we have got Rs 100 bn in this SPV (special purpose vehicle) to build something on infrastructure, details yet to be worked out! Well, what is this SPV supposed to do? We don't know. To put Rs 100 bn in perspective, it is about US$ 2 bn or roughly about 0.3% of India's GDP. This is the country, which needs to spend US$ 50 bn or something like 9% of GDP just on building these roadways. We will spend US$ 150 bn, which is another 25% of our GDP on building power plants, forget about the airports bills, ports bills and everything else. Just these two items are more than 1/3rd of our GDP and yet, instead of 30% of GDP, fine, you can't spend this in one year, but if you want to be bold, then you got to put 10% of GDP on the table."

    To conclude, while the budget has been good on the taxes front and the overall direction that it has given, it has offered little hope that Indian infrastructure spending will break out of the low 5%-7% share of GDP that has prevailed over the past few years. If we really wish to break the jinx of a low Hindu rate of growth and sustain at higher levels, infrastructure needs to be given the prominence that it deserves. That's all!



    Equitymaster requests your view! Post a comment on "Budget: That's not all!". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)