"The best plans of men are bound to fail at the last moment"The Indian Budget 2009 was no exception.As Mr Mukherjee read the budget the stock markets fell like a pack of cards.For record the BSE sensex tumbled by 900 points and NIFTY pulled down by 250 points.Meanwhile the analysts and business people tried to reassure the public that the budget was good and had the ingredients to take the economy back on track.However if markets are taken as a leading indicator of future performance of the eco0nomy..clearly Mr Mukherjee has been given a thumbs down ..
So what was all the hysteria about the budget and is it all that bad?Lets analyse point by point.First lets review the prologue i.e the market and business expectations out of the budget.
As i had pointed out in one of my earlier posts the UPA winning an absolute majority was a historic moment for India..for it Indicated that we could put the reforms back on track..with no Marxists or Jaylalitas of the day playing the spoilsport.As a result with Manmohan leading the government ..the business people and markets had started expecting another revolutionary budget like that of 1990's when Indian economy took its first step towards free market capitalism.This time around markets expected a visionary budget which would put India in another orbit all together.SOme key expectatios were:
- Govt to launch schemes to make India a technological capital of world
- Govt to dilute its stake in PSU Banks
- Removing FDI Cap in many sectors
- Direct Stimulus packages for industry in form of massive tax and excise waivers
- Refinancing of PSU Banks to improve the liquidity situation in the markets
- PPP and direct entry of private players in sectors like railways,defence,nuclear power etc
- Increased focus on education both primary and higher
- Steps to increase agricultural productivity and boost rural demand
However we go for outright criticism of the budget let us see whta Mr Mukherjee has tried to do.The world economy clearly is still in turmoir..things have started improving but not improved yet.The business enviornment needs a kind of stimulus top put it back on track.now there are mainly two ways of doing this:
- Refinance your banks like US to decrease interest rates and flood the markets with money which would increase the incentive for producers and hence lead to job creations and economic reviveal
- Direct spending by government in key infrastructure and other areas to stimulate direct growth
Therfore on the surface the budget looks to be on track..then why such a thumbs down by india Inc.Well to understand thsi lets take a closer look on the budget highlights:
- Mr Mukherjee has clearly forgotten the urgent need for increased expenditure that India needs on infra needs.The onloy blue lining is refinancing of current PPP projects to ensure they are not abandoned.There has not been any major infra announcements like the golden quadrilateral by NDA govt etc
- The budget is focussed more on socio economic upliftment.While this is good but the increased spending on schemes NREGA is not favourable as these schemes are highly inefficient with large leakages.In many cases we have workers not being paid for months together.thus aim of increased spending on socio economic schemes as an aid to economic upliftment stand vanquished
- There is no provision of govt exiting from PSU banks.As a result the liquiduty situation may to continue to remain tight.However the point is arguable and hence we may not take this as a strong red mark in budget
- The budget estimates a fiscal deflicit of 6.85 of GDP as estiamted in budget plan 2009 is too high for any standard.This is mainly due to extravagant spending by govt. on socio economic schemes.To finance these schemes Mr Mukherjee is opting for govt borrwing.This may lead to tightening liquiduty situation in the market with banks investing major chunk of the money in Govt bonds rather tahn lending it to publisc.This is clearly a recipie for disaster which would reduce consumer spending and investments in public sector.As Prem shankar Jha points out in ET "this is a clear recipie for stagflation"
However borrowing from foreign lands is a hazard as we would have to pay interests in precious foreign currency..leaving little room for technological,industrial and natural resource aquisition abroad.however if we are able to put industry back on track we may be able to get additional loans to achieve the above stated facts.
So the budget may have disappointed many of us but you never know..markets always play the dice..if Mr Mukherjee is able to pull this out by foreign borrowing and efficient implementation of socio economic and infra schemse..this might be the revolutionary budget we were looking for
Happy Blogging :)