The best way to handle the deficit would be to generate funds through disinvestment of government shareholding in PSUs. This need not change the character of these companies i.e. even while retaining 50 – 75 per cent shareholding the government can sell shares and generate huge funds for financing the deficit. Public shareholding in PSUs,also increase transparency and improve governance.

Considering the overall global economic scenario,while it is understandable that the government needs to spend money to stimulate demand in the economy, what disturbs the market is the consequences of such huge government borrowing . The money market,will get disturbed & the interest rates will move up significantly affecting the overall economic recovery. The budget deficit needs to be bridged through other means including PSU disinvestment. FDI also needs to be encouraged in appropriate sectors.

The capital markets would wait to see specific moves of the government in the direction of bridging the deficit and the sooner the government announces concrete steps the better it is.

now that the budget’s also come in and the resultant bashing has started by the opposition parties…what in your opinion is the single biggest fiscal measure and discipline that the government must take to take the country forward…
many thanks…also, you’ve stopped writing I guess…pls don’t do that….it keeps us in the US cluend on to what’s happening especially with your analysis et al…regards
simmi

Sir would request your comments on this article.

The much-awaited Union Budget was presented today in the parliament by Finance Minister Mr. Pranab Mukherjee.

Markets anticipated few major announcements from the FM on various measures like concerns on growing fiscal deficit, disinvestment, GST, STT, FBT, FDI, reforms on BFSI segment, sops for education / real estate, etc. Post the budget presentation by the FM, the major issues on fiscal deficit and divestment still remained unanswered.

Although we believe abolition of FBT, CTT and introduction of GST are good moves. At the start of the speech FM mentioned ‘One budget can’t solve all the problems’. We take this statement as a positive note and a first step towards ensuring a gradual and sustained growth in the long term. This has been complimented by measures like higher emphasis on maintaining GDP growth of 9%, agriculture growth of 4%, higher allocation for infrastructure development via NHAI, IIFCL, APDRP, RGGVY, National Gas Grid, etc. This enhances our belief that government has a focus on development.

The key concern has been the growing fiscal deficit which has further been proposed to be higher at 6.8% of GDP. The FM has not touched on the roadmap to either reduce the fiscal deficit or on the sources to raise further money via divestment / 3G auctions. Although the government is targeting to raise money of Rs 25,000 crores via divestment, Rs 35,000 crores via 3G auction and some more via NELP VIII licenses sale. This would to an extent reduce the pressure build by burgeoning fiscal deficit. Removal of FBT will lead to a loss of around Rs 10,000 crores in revenue which would partly be compensated by 5% additional MAT proposed on companies.

Overall we believe the budget was focused on achieving economic development and a sustainable growth. But higher expectations were led by lack of announcements on measures to reduce fiscal deficit, divestment, reforms for BFSI, FDI policy has not gone well for the markets. And the result was major indices tumbled with Sensex and Nifty down nearly 6% each.

There has been lot of voices on disappointment from the budget. But I would like to raise one point here that is: Did FM had any other way to reduce the fiscal deficit? If at all he had touched the tax structure .. Was India Inc ready for tax rate hikes (direct or indirect)? The answer is simply No. Although India has not been much affected by the global turmoil but there has been an overall slowdown across sectors with negative growths coming in.

The focus of FM clearly was first to bring back the economy on growth trajectory and then look at issues like reduction of fiscal deficit.

By Sandeep Chhajed

Exactly, China’s reponse to the crisis has been a success. Like India, it has been dettached from the chaos of the Western economic superpowers. But while in case of India we strongly consider the movement of the stock market to discuss the future of its economy, in case of China the stock market is unlikely to have a significant impact on demand & confidence. The stock market in China is still very small as against the overall GDP. The real estate market is more important. Consumers, banks and corporates are far more heavily invested in property than in stocks.