• OUTLOOK ARENA
  • VIEWS ON NEWS
  • FEBRUARY 25, 2009

From morality to flexibility

Government pushing on the fiscal accelerator
Perhaps the UPA government has become extremely confident of its victory in the upcoming general elections. Because then it will be able to privatise a few government assets and in one fell swoop, bring the ever so ballooning fiscal deficit under control. There is hardly any other rationale to indulge in another round of fiscal stimulus as it did yesterday, even as global rating agency S&P lowered its outlook on India. Fiscal deficit as a percentage of GDP, a measure of how much more the government spends than it earns, is already expected to touch 6% and with the latest tax cuts thrown in, it may rise further to 6.5%. And this is without considering the off-balance sheet liabilities like oil and fertilizer bonds.

Contrast this with the target of 2.5% and the magnitude of the fiscal profligacy becomes evident. Little wonder, S&P has lowered Indian sovereign ratings to the lowest grade in the investment grade category. In fact, it has even threatened to push the ratings into the 'junk' category if the fiscal situation continues to worsen. The government on its part has claimed that it anticipates economic scenario to worsen further and hence, had to indulge in another round of fiscal stimulus. It took advantage of the 'flexibility' that the constitution provides to incumbent governments to take policy actions even in an election year. Contrast this to the blahs-blahs of 'propriety' (or morality) from the Finance Minister during his interim budget announcement as he did not announce any such economic booster.

China's attempt at boosting its auto industry
While India cannot escape a rap on the knuckles with fiscal stimuli of the order of a few percentage of GDP, China has unleashed spending of more than 25% of its GDP and not even few eyebrows are being raised. This is because unlike India, China runs a huge fiscal as well as current account surplus, giving it enough room to loosen its purse strings. And it is doing just that. As per Bloomberg, the dragon nation has drawn up a plan to strengthen its domestic auto industry and turn few of its home grown brands into world beaters.

Although car demand in the world's most populous nation has fallen for five of the past six months, abolition of some road taxes and other measure have helped contain the fall, and even enabling it to surpass US as the world's biggest auto market last month. However, the country's auto companies continue to remain 'cheap assemblers' for world's biggest auto companies like GM and Toyota, a scenario it is hoping to change. It attempts to do so by bringing in consolidation in its auto industry and build 2-3 automakers with annual sales of more than 2 m vehicles by 2011. It wants another four or five with sales above 1 m by the same point.

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 (Research Analyst) bearing Registration No. INH000000537 (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, Canada or the European Union countries, 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 (Research Analyst)
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