by NR INDRAN / INT

Mumbai : The Indian economy is hitby the “European Dilemma” of need for austerity with growth. High crude pricesand lack of political will to pass on the hike in crude prices, other food and fertilizersubsidies to the customer has put a severe strain on the already stretchedgovernment finances.

Policy paralysis, high inflation and hence rising interestrates have resulted in an investment-led slowdown in economy. Hence, fiscalausterity on one side and reformist budget supporting growth on the otherbecomes the need of the nation and this makes the budget exercise extremelychallenging. Recessionary global economic environment makes this task even moredifficult.

The Political desire to have a populist approach to public finances,despite knowing economic consequences, has become stronger post the recentdebacle of ruling UPA II in state elections. Stark deviation in budgeted &expected numbers of fiscal deficit, divestment, GDP growth, governmentborrowings & subsidies for current financial year has made a mockery of thebudgeting exercise weakening the credibility of the Finance Minister.

In the comingUnion Budget, market participants would not only like to carefully watch thesenumbers but also the approach to achieve stated numbers so as to regain someconfidence in the sanctity of the budgeting exercise.

In the current environment,7%-7.25% GDP growth assumption for budgeting with a 6.5% of inflationexpectation (nominal growth assumption of 13.5% to 13.75%) would be mostreasonable and any number beyond this would need supporting policy decisions.

Market is hoping against the hope to have a 3 to 5 year road map for fiscalconsolidation knowing very well that fiscal austerity road map would bedifficult to comply with given the propensity of ruling parties to beextravagant immediately before the general elections which are due in 2014.

Similarly, any projection of fiscal deficit of more than 5.25% of GDP would notbe liked and any number below 5% would be looked at with skepticism. Roll backof fiscal stimulus of 2% of excise duty given few years back is part of the generalexpectation and hence would not be taken negatively.

Any announcement relatedto loan waiver, farm waiver, food security bill etc should best be avoided.Long pending reforms like GST, Land Acquisition, Mining Bills, Fuel PriceDeregulation and progress on DTC & GST, FDI in Insurance, Retail, andAviation are important but evolving a consensus among the various politicalparties would be a challenge.

Market also expects initiatives in the powersector to support the ongoing reforms in this sector, boost to agriculture& housing sector & policies addressing supply-side bottlenecks ofagriculture produce. Government initiatives to restore investment climate forlong term sustainable growth would also be closely watched.

India’s political landscapeis changing rapidly and small & regional parties are gaining dominance therebyputting a strain on the national level policy making and hence building a consensusfor any reform or initiative would become an uphill task. Perhaps time has comefor India to pay the price for democracy.

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