Boosting business sentiment should be goal of Budget 2012

India’s annual budget for 2012-13, due in two weeks’ time, is crucial given the challenging economic environment at present. With a growth slowdown looking imminent, inflation still not entirely under control, less than supportive global environment and high interest rates, experts think that a policy that boosts business sentiment could be key to an improved performance in the coming year.

According to Ajay Shah, economist at the National Institute of Public Finance and Policy (NIPFP), “Business confidence on the part of the domestic and the foreign private sectors is of utmost importance in India when thinking about business cycle conditions. Investment is a large fraction of the gross domestic product (GDP), and investment is entirely forward looking.” (Watch video)

Indeed, it might be important to consider sentiment, given the fact that the latest survey numbers are far from inspiring. CII’s business confidence index for the third quarter of 2011-12 actually fell by 5 percent from the previous quarter as per figures reported in January 2012. Concerns about credit availability and a halting of investment plans were reported as major reasons for the declining confidence.

This trend is backed by investment data released by the Central Statistical Organisation (CSO) as well. As per the advance estimates released by the organisation for 2011-12, Gross fixed capital formation (GFCF), which essentially represents investments, is expected to grow by 5.6 percent, even while the overall GDP (at market prices or inclusive of indirect taxes) will grow by a healthier 6.9 per cent. And even this sounds like an optimistic number in the light of the fact that investments actually shrank by 0.2 per cent in the July-September 2011 quarter.

With this as the backdrop, Shah is of the view that the budget has to be forward-looking: “To the extent that the budget shows a gameplan for economic policy, shows a clean vision for where India is going as a market economy, to the extent that the budget is focussed on good institution building on fiscal, financial and monetary reform, that will reassure the private sector that India is moving in the right track. And then people will be more willing to invest”.

The government might need to work hard to bring confidence back on track, but the budget is a good place to start.

Watch the whole Firstpost interview here.

****See more Budget 2012 videos and expert views on Firstpost:**** Rupa Rege Nitsure .