• NOVEMBER 29, 2001

Economy: The buck stops here...

The government's revenue collections (till November) fell by 3% YoY, to clock Rs 990 bn as compared to Rs 1,020 bn in FY01. On the borrowing front the government has already completed 90% of its gross borrowing for the fiscal. Thus, it seems the fiscal deficit figure is not going make the finance minister happy. However, the only positive note is that the incumbent government at least understands its responsibilities.

Finance minister seems to be ready to go ahead with the fiscal responsibility bill even as the parliamentary committee headed by Mr. Shivraj Patil has recommended diluting of the pioneering steps that have been incorporated. The responsibilities, this bill, plans for the Govt. to undertake are lowering revenue and fiscal deficit by 0.5% every fiscal year beginning April 1 and no borrowing from the RBI. The committee feels that these provisions are not pragmatic and induce excessive rigidity into decision making.

But where has so much of flexibility got us? It is time that the buck stops somewhere. The RBI's recent move to reduce CRR limit and improve the interest rate flexibility is subject to the government getting a reasonable control over the fiscal deficit situation. A low fiscal deficit would mean the governments would need to borrow less, there by increasing the money supply in the system. This could consequently, reduce the cost of capital for the businesses.

Thus, the government has three alternatives

  • Improve its earnings
  • Cuts costs
  • Improve efficiency

The successive governments have been concentrating on increasing revenues. Not much of a though has been given to reducing costs. For the past seven years (FY94 to FY01) the government's revenues have grown at a CAGR of 15.5%, while the revenue expenditure has grown almost as fast by 14.8%. The government seems to have got a control over its interest and subsidies costs. However, it is the administrative costs that are a cause for concern.

On the other hand, NCAER has revised it GDP growth projections southwards and now estimates a 4.8% growth for the current fiscal as compared to 5.6% projected earlier this year. The sharp decline in the numbers for agriculture is a cause for concern. The markets do believe that the monsoon has been normal and rural demand is expected to improve in the fourth quarter. However, NCAER believes that the monsoon has been lower than normal. However, a figure of 3.8% growth for the agriculture sector is very healthy considering the growth rate of 0.7% last year.

GDP Growth: Downward revision
  August November
Agriculture 5.5% 3.8%
Industry 5.7% 4.8%
Services 6.1% 5.9%
Total 5.6% 4.8%

The targeted fiscal deficit figure for the year was based on a 6% plus growth rate in GDP. Therefore, the revenues are likely to be lower and the spending shows no sign of being harnessed. This could put pressure on the interest rates in the near future and the RBI could have to roll back its bold steps. This in turn would negatively impact the sentiment on the bourses. The sentiment has been upbeat for quite sometime now. However, the news on the economy front could prove to be the domestic damper.

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