Finance Minster's balancing act - Views on News from Equitymaster

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Finance Minster's balancing act

May 28, 2009

India's finance minister, Pranab Mukherjee, has a tough balancing act ahead of him. On the one hand, he plans to push for growth by spending funds raised from government borrowings. On the other hand, he plans to rein in the fiscal deficit at 5.5% of GDP. Mr. Mukherjee says, "We are committed to restoring growth and employment and that would not have been possible without increased spending funded by incremental borrowing. This would need to be further continued. We are equally committed to the process of fiscal consolidation over a period of, say, two-three years."How does he plan to accomplish this? He will push for economic reforms, which will help attract investments, and in turn boost revenue. That will stimulate growth as well as improve the fiscal deficit situation. While investors seem to be responding really well to any mention of reforms, we believe much will depend on the actual execution of the plans.

Rally doesn't indicate economic revival
As per Mr. Rakesh Mohan, the Deputy Governor of RBI, the rally in equity prices does not indicate that an economic recovery is in sight. The central bank takes several indicators into consideration in it assessment of the economic situation - financial markets, industrial production, GDP growth, agricultural production, monsoon, bond markets. Hence, the RBI will not reverse its easy monetary policy just yet.

It may be noted that it has taken several steps to infuse liquidity in the Indian economy and prop up growth - slashing interest rates, reducing reserve ratios and buying back government bonds. In fact, as per the Wall Street Journal, the RBI plans to buy back government bonds to the tune of Rs 800 bn in 1HCY09. Interestingly, Mr. Mohan says that formulating monetary policy in India is more difficult than in other countries because of the juggling act required to balance administered interest rates, capital account controls and a big fiscal deficit. We wonder if the RBI has been able to avoid the financial meltdown because of some of these restrictions or in spite of them. In either case, credit must be given to our central bankers for being among the best in the world.

Natural gas prices set to double?
As reported by Business Standard yesterday, the administered price of natural gas from state owned upstream companies like ONGC and OIL is set to be doubled to US$ 4.2 per m British thermal units (mBtu). It may be noted that there has been a long standing demand from the industry that gas pricing should be decided by market forces. However, ONGC continues to charge an average price of only S$ 2.02 mBtu even after the government fixed the price of RIL's KG basin gas at US$ 4.2 per mBtu.While this would be a positive development, it is advisable to wait for an official announcement given the vacillation that tends to happens on such issues.

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