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Govt Ups Spending To Spur Growth; Markets Disappointed

06 July, 2009

The government said its fiscal deficit would widen as it increases spending on infrastructure and help for farmers, disappointing investors who had hoped the new government would use its strong re-election mandate to usher in a wave of pro-market reforms.

Stocks fell 5 percent and bond yields spiked after Finance Minister Pranab Mukherjee, sticking to the ruling Congress party’s theme of “inclusive growth”, said on Monday that the fiscal deficit for the year ending March 2010 would increase to 6.8 percent of GDP.

Investors had expected the fiscal deficit to grow to up to 6.5 percent as the government ramped up borrowing and spending to spur economic growth, from 6.2 percent in the previous year.

The first budget of Prime Minister Manmohan Singh’s new administration, seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was reelected by an unexpectedly decisive margin, focused heavily on farmers and the poor.

“The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

“While the thrust on agriculture, infrastructure, etc., augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term,” Nitsure said.

Budget documents show the government’s gross market borrowing in the current fiscal year would total 4.51 trillion rupees ($93.4 billion), 14 percent higher than a Reuters poll forecast and 23 percent higher than the borrowing target cited in an interim budget in February.

“The first challenge is to return the GDP growth rate of 9 percent per annum at the earliest,” Mukherjee said in his address to parliament. “The second challenge is to deepen and broaden the agenda for inclusive development.”

Some market watchers expressed concern that Mukherjee did not unveil significant reforms nor provide details on plans by the government to sell stakes in state-controlled companies.

“He did not come out with key policy changes – PSU (public sector undertaking) disinvestment, securities transaction tax, raising FDI (foreign direct investment) limit for banking and insurance and FII (foreign institutional investor) limit for key sectors,” said Madhavi Vora, managing director, ULJK Securities.

“It is really a big disappoinment,” she said.

DEFICIT WOES

Mukherjee said overall spending would increase by 36 percent this year, but also called for a return to fiscal responsibility targets “at the earliest.”

His budget document said the fiscal deficit target would be closer to 3 percent of GDP in the year that ends in March 2012, assuming a global economic recovery.

He said states should remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.

Inadequate power supplies and transport links have long choked India’s growth potential.

Unconstrained by its previous alliance with leftist parties, Singh’s new government had a freer hand to implement economic liberalisation measures to drive expansion, but focused instead on rural development and support of social programmes.

“It is essentially a rural development-oriented budget,” Singh said after the budget speech. “It is a measure of our committment to the well being of the poorer sections of our community.”

India is hobbled by a fiscal deficit that ballooned to 6.2 percent in the financial year that ended in March. Including off-balance sheet items like subsidies for fuel and food, as well as state-level shortfalls, India’s overall fiscal deficit for the year that ended in March was about 10 percent of GDP.

That compares with below 3 percent of GDP for China and more than 12 percent for the United States in the latest fiscal years.

India’s economy, Asia’s third-largest, grew at 6.7 percent in the most recent fiscal year, held back by the global downturn, after expanding at least 9 percent for three straight years.

The finance ministry said on Thursday that growth could rise to 7 percent this year — towards the high end of the range of private forecasts — and subsequently increase to 8.5 to 9 percent if the government adopted sweeping reforms and accelerated infrastructure development.

With the developed world mired in recession, big emerging economies led by China, which is on track for 8 percent growth this year, and India account for a rising share of global output and are expected to help drive worldwide recovery. Both economies have been fuelled by stimulus spending to spur domestic demand.

The run-up to India’s annual budget announcement, always subject to fierce jockeying by ministries, industries and other interest groups, was especially frenzied this year given the ruling coalition’s decisive electoral win.

Anticipation that the government would unleash sweeping market-oriented reforms sent Indian stocks surging 17 percent on the first trading day after the election result in May. Indian stocks jumped by nearly half in the April-June quarter.

 


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Govt Ups Spending To Spur Growth; Markets Disappointed

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