A Budget aimed at fiscal consolidation? Rubbish, says expert

Fiscal consolidation - that seems to be the buzzword for the Union Budget. Almost everyone thinks the Budget will contain proposals to whip the government’s finances into better shape.

Currently, the biggest concern for most experts is the yawning fiscal deficit - the gap between government revenues and expenditure.However, contrary to popular opinion, one expert thinks that anyone who believes the government will announce fiscal consolidation measures will be sorely disappointed.

That man isSailesh K Jha, head of Asian market Strategy at Bank Skandinaviska Ensilda Banken (SEB), a North American financial group, who told Mint newspaper that the fiscal deficit for next year could be even higher than this year’s.

“We think that in March, for fiscal year 2012-2013, the fiscal deficit target is going to be around 5.2-5.5 percent, up from probably around 5.1-5.4 percent for fiscal 2011-2012,” he said.“It’s not clear to me at this stage of business and political cycle that the government has any intention to engage in fiscal consolidation.”

Against a budgeted deficit estimate of 4.6 percent of gross domestic product (GDP) for the year ending March 2012, most economists believe the deficit could come in as high as 5.6 percent - a full percentage point higher.

A higher fiscal deficit has significant implications for inflation and interest rates (a higher fiscal deficit forces the government to borrow funds from the market, which reduces the amount of funds available for the private sector and raises the cost of capital as well).

If Jha’s predictions are not enough to upset those nursing hopes about fiscal reforms, there’s more.

He’s equally gloomy about the prospects for inflation, the rupee and stock markets.

“Our view is essentially that inflation will reaccelerate over the next several months….,” Jha said, adding that by summer, the Reserve Bank of India would have to reverse any easing of monetary policy because demand pressures will build up again even as commodity prices continue to rise.

Firstpost has also pointed in this story , as well as this one that inflation is far from being tamed- and that the Reserve Bank of India will have little room to make generous or sustained rate cuts. Both food inflation and fuel inflation are poised to surge again in coming months.

He’s not impressed about the recent rise of the rupee either.“I think we are going to reverse over the next several weeks back up to 55 (against the dollar),” he said, referring to the rupee.On the exuberance in markets too, he thought that the flows currently were “highly speculative” and that it was unclear whether medium-to-long term investors had changed their view on India.

For the entire interview, read here.