Getting growth back is going to be a long process
Most are choosing to ignore the statements by various ministers on how pricing reforms aren’t so critical, or on how the retrospective tax amendment won’t be easy to make. The final decision, the view is, will be that of Modi. So, just as Modi seems to be backing Aadhaar-based cash transfers as a means to cut subsidies now, after the home minister seemed to put it on the back burner, the view is the prime minister will ensure gas prices are raised, he will ensure that states are made to raise power tariffs regularly if they want central assistance. After all, after the BJP backed the land acquisition Act, it was Modi who got the government to start relooking it.
While the Railways move to back FDI and the PM’s statement about needing to develop railway stations like airports is certain to get investor sentiment up, the general Budget will be looked at for the signals it gives as to the government’s medium-term reforms plan. This could include greater FDI limits in defence, removal of taxes on SEZs, correcting the inverted duty structure, readying to introduce GST, greater emphasis on infrastructure … And once stock markets rally to newer heights, it will encourage announcement of new investments and, to the extent debt-ridden firms can raise fresh money or can sell off projects to retire debt, it makes the banking system that much more healthy and also allows firms the ability to raise more money.
What investors would do well to keep in mind, the post-budget markets euphoria—assuming there will be one—notwithstanding, most firms cannot start investing as they are too cash-strapped and banks simply don’t have the capital to lend beyond a certain pace; foreign borrowings are a temporary way out, but the central bank will be cautious about opening the window too quickly, or too widely. This is why it is important the Budget take a call on the Banking Investment Company since it is critical for recapitalisation of banks.
More important, savings have to equal investments at the economy-wide level, with a certain small proportion coming from foreign savings. Indian savings, however, have plummeted from 36.8% of GDP in FY08 to 30.1% of GDP in FY13. Household savings aren’t really the problem, and have remained steady at 22.4% of GDP in FY08 to 21.9% of GDP in FY13; corporate savings have fallen from 9.4% of GDP in FY08 to 7.1% in FY13; the biggest problem has been with government savings collapsing, from 5% of GDP in FY08 to 1.2% in FY13. Unless this is fixed, any improved investment that a Jaitley budget will cause, more so if matched with an increased spending by PSUs, will only cause interest rates to spike. Which is why, apart from the policy pronouncements, the budget’s mid-term fiscal correction programme will be critical. It is interesting to note that the latest, 3%-of-GDP target for the fiscal deficit in FY17 is the same target set for FY09 in the FY07 budget. Of all the budget promises, fiscal responsibility is the one paid the least attention to.