This Budget – A Solid Statement of Growth Account
V. Shunmugam[1]
Dalal Street Investment Journal July 2009
It was a bold attempt on the part of the finance minister to state the government’s objective to put the country on a long-term growth path, taking a chance at the deteriorating fiscal situation especially at a time when the human memory is getting shorter. It should have sent to the markets the signal that they can have a higher P/E ratio and, thus, invest in the economy to reap the demand created for the organized sector-offered goods and services. However, the markets (at least the cumulative index indicator) went swirling down keeping everyone — except those who pulled them down — baffled about who seemed to know or better analyzed the impact of the announcements being made by the FM on the floor of Parliament before reacting to it in the markets and as to is it so market-unfriendly a budget to talk about. It leaves one wonder: why did the markets react so strongly (almost the steepest decline in the past decade – see table), making a large portion of the investors run for cover in apprehensions that lower-than-expected returns were already built into their investments?

Worth to note that both electronic and print media debated the episode widely, putting the reasons on the expectations of the markets and the disappointments. What came out clearly was that the government had failed to detail the fine lines of the reform measures that it was expected to carry on, thus making investors lose faith in the expected growth story and reform measures that would carry the economy and, hence, the markets higher ups. Besides, the central fiscal deficit was also an area of concern for the large number of institutional (domestic and foreign) investors.

Even two months ago when the UPA government, largely consisting of reformists, won the second term at the Centre, the markets reacted strongly, surging ahead by almost 17% in expectations that the new government would carry out various reform measures during its next 5-year tenure. People who thought this budget did not propose any reform measures should not miss that it did touch the tip of large reform measures that the FM would want to bring in terms of rationalizing revenues and expenditure. For example, it trod upon an area almost none of the previous budgets had touched: reforming the fertilizer subsidy and more innovatively so based on nutrient need assessment and targeting the farmer directly. Also, the FM announced a committee to reform petroleum derivative pricing apart from various other minor reform measures, which will be a big stride towards economic liberalisation. However, the strength of the intent was overtly missing in the announcements (including disinvestment) read out on the floor, and the markets probably missed reading the fine line. Those who could read the fine print of the budget can be sure: those who sold on the day in the market would envy and those who bought would be envied in another month or so. Of course, the proof of the pudding will be in its making.

Also, on the other hand, fiscal deficit at this point of time should not be a concern for a country flush with resources to be able to repay conveniently in future. Of course, a para from the FM on his mid-term policy on deficit management could have done a world of good to the markets. One who looks at deficit should also look at other hard and soft infrastructure investment that the government is intent on making. While, on the one hand, it would generate enormous demand in the immediate term, it would also streamline economic efficiency over a long period in time making the economy more competitive in a globalized scenario — what we strive to achieve. For example, I fail to understand why the markets failed to look at the rural sector spending which will convert cent percent into consumption on the one side and the commodity demand and employment generation — a natural corollary of hard infrastructure investment as proposed in the budget. After all, the markets just lost a part of the flesh that they had put on during the day of election results announcement. The lesson to take home: Rome is not built in a day — a measured reaction is always good for the markets than unwieldy expectations.

[1] Author is Chief Economist with Multi Commodity Exchange of India Ltd., Mumbai. Views are personal.