India’s budget – the first since the ruling Indian National Congress party was returned to power by voters in May – was “a mixed bag at best”, said S. Narayan in Mint. Heavy on ambitious plans, such as a rapid return to 9% growth and big cuts in poverty, and with an equally hefty price tag to match, it was “a throwback to the budgets of the 1980s”. Markets, which don’t have fond memories of that pre-reform era, sold off hard; the Sensex benchmark dropped 5.8% on the day.
There were a few positives in finance minister Pranab Mukherjee’s plans, said DBS Bank. “The quality of government expenditure has always been largely poor with interest payments and subsidies taking up most of the revenues.” But this time the spending rise seems to be mostly “of a productive nature… ‘investment’ as opposed to ‘consumption’”. This included increased financing for public-private partnership investments in infrastructure, and higher direct allocations for investment in crucial areas such highways and power.
What the commentators said
Elsewhere, “rural India and the ‘aam aadmi’ (common man) will be the key beneficiaries”, said Anubhuti Sahay of Standard Chartered. “Pro-poor” policies include debt relief, agricultural lending and more money for a scheme that employs rural families on development projects. This has some merit, but is also “politically astute”, given the Congress party “would not have triumphed at the polls without the support of the rural poor”, observed The Economist.
Despite these moves, which should be positive for long-term growth, “foreign investors are very disappointed”, said Deepak Lalwani of Astaire Research. There was “a missed opportunity to signal reforms in insurance, pensions, banking [and] raising [foreign institutional investment] limits in key sectors”. More significantly, the fiscal deficit is high, forecast at 6.8% in the current year (that doesn’t include off-balance-sheet items and local government borrowing). Unless curbed soon, this is likely to frighten investors.
Standard & Poor’s said the budget left lots of negatives and India’s credit rating – currently BBB-, the lowest investment grade level – may be lowered, a contrast to emerging giant Brazil, which is on the verge of being upgraded due to its “smart monetary and cautious fiscal policies”, said Aliza Rosenbaum on Breakingviews. Of course, “fiscal deficits are solutions, not problems, in a recession”, said Swaminathan Aiyar in India’s Economic Times. But fears “that India’s fiscal deficit is structural, not cyclical” are legitimate. Mukherjee “needs to prove this is not so” by laying out a clear plan for bringing down the deficit over the next few years.