It is time to walk the talk for India’s finance minister, who will have to play the adroit helmsman to navigate a slowdown-hit economy through the rough seas of burgeoning deficits, weather populist pressures ahead of elections, calm global rating agencies and revive business confidence.
The stakes are high for P. Chidambaram, the architect of a dream budget more than a decade ago, when he presents the 2013-14 budget on Thursday. Economic growth has almost halved to 5 per cent from a peak of near double-digits, inflation remains above the central bank’s comfort level and the fiscal and current account deficits have breached the danger mark.
“Judge me by this budget,” the Harvard-educated Chidambaram told a gathering of foreign businessmen and investors during a tour of two continents recently, pumping up expectations for market-friendly policies aimed at attracting investment and to help the country achieve its growth potential.
His live-wire performance since taking over the finance ministry last August has added to the halo around the charismatic lawyer who hails from a wealthy business family in the southern city of Chennai.
Although he lacks a strong political base of his own, Chidambaram more than makes up with pragmatism, forceful argument and ability to push ahead against heavy odds.
This was evident in September when he kick started several long-stalled reforms such as opening the supermarket sector to global giants like Wal-Mart, slashing subsidies on fuel, allowing foreign participation in the pensions sector and watering down retrograde tax rules moved by his predecessor – Pranab Mukherjee, who is now the president.
“The finance minister has dramatically put his reputation on the line,” IDFC Securities said in a report, noting that he will have to balance political compulsions in the run up to nine state assembly elections and national polls due by next year and an unenviable macroeconomic situation with the slowest growth in a decade, high inflation and interest rates and worsening current account deficit.
It believes Chidambaram, who has managed to erase the “policy paralysis” tag that epitomised the Congress party-led coalition government for much of its term in office, will present a budget that “may surprise more positively”.
There is little doubt that the finance minister has a tough job on his hand. The consensus is that the budget would be austere, meaning there will be heavy cuts in government spending plans. This could further slow down economic expansion, especially if the chopper falls on investments in infrastructure projects.
“Every budget is a tightrope walk for the government and this will be no different,” analysts at Nomura wrote in a note titled “India budget preview: Balancing prudence and populism”.
Although the risk of populist measures runs high, it said that fiscal consolidation was the need of the hour, and rating agencies would sift through the finer budget details to judge India’s sovereign credit rating, which already has a negative outlook at two ratings agencies.
“As such, we expect the government to announce some populist schemes, but all within the limits of fiscal prudence,” it said, adding it expected the government to budget its fiscal deficit at 4.6 per cent of GDP in 2013-14 from a revised target of 5.3 per cent in 2012-13, supported by a combination of lower expenditure growth and continued asset sales.
However, the credibility of the budget will depend on the underlying assumptions on growth, asset sales and subsidies.
“Since 2013 is a pre-election year, we believe budget projections should be taken with a pinch of salt,” Nomura said.
Particularly so with the expected presentation of pre-election bonanza in the form of a Food Security Act, which proposes food grain entitlement for up to 75 per cent of the rural and up to half of the urban population. Households below the government-set poverty line would be entitled to 7 kg of subsidised food grain per person per month.
“This would raise the government’s food subsidy to around 1 per cent of GDP, in our estimates, “ Nomura said. “We expect the government to showcase the Food Security Act and the direct cash transfer scheme as its key achievements in a bid to woo the electorate ahead of the election.”
Ahead of the main budget, the government will present the railway budget on Tuesday, followed by the country’s economic health the next day which would provide a clearer picture about what to expect.
Basically, while fiscal consolidation would provide a strong foundation for the medium term, spending cuts is a recipe for slower growth in the short term.
These conflicting scenarios have taken a toll on the stock market. The
top-30 Sensex has dropped 4.4 per cent since hitting a two-year high of 20,203.66 in January. The widely tracked benchmark has fallen for four consecutive weeks to 19,317.01, and is down 0.6 per cent since the close of 2012.
“It is good that the markets are going into the budget with weakness because I am very hopeful about the budget that it is going to be very positive for the equity markets,” Rajen Shah, chief investment officer at Angel Broking, told ET Now television channel.
That optimism also runs deep among foreign institutional investors who have a longer term view. Foreign funds have moved $9.3 billion into Indian markets in just under two months, including $8.4 billion into shares, according to data from the Securities and Exchange Board of India.
“The overall outlook and investment sentiment towards the equity market from a longer term investment horizon remains positive,” ICICI Securities said after a survey of fund managers, adding 70 per cent of the respondents expect the market to be up between 10 and 15 per cent by end of 2013.
The writer is a journalist based in India.