Chances of good budget = zero; but don't fret about markets

By Senthil Chengalvarayan

I am going to be telling you what I think the budget will be like, but before I begin with my gloomy prognosis, here is the good news. The stock market rally that we have had since the beginning of this year did not get its legs from hopes that this government would wake up one March morning to sudden economic enlightenment.

Let us be clear. What has driven this rally is global liquidity. Fortunately for us, events in Europe, where the European Central Bank has offered banks almost unlimited cash at low interest rates, and in the US, where household savings have gone into mutual funds, will ensure that we will be awash with liquidity for some time to come.

So the markets, which will of course welcome a prudent, investor-friendly, reformist budget, will not tank if we get one that has both eyes on the general election, whether snap or in 2014. The chances of a prudent, investor-friendly budget are zero; the chances of us getting the other kind are much more likely.

And here is where I want you to make another distinction; between the UP elections and the budget. There never was much connection between the two. To have believed that this government would have gone on a reform binge if the party and its allies had done well in the UP elections is to assume that UPA-2 had a reformist streak or two in it to begin with. This is a party led by a family that has never supported economic reform in public and which, if reports are to believed, has refused over the last year or so to even engage with the country’s corporate and investing class.

“They prefer,” as Dhiraj Nayyar, a columnist with India Today, said in the magazine in December, “to talk to India’s poor. Patronising the poor with government freebies, in return for votes, seems to be the cornerstone of their political strategy.”

The point is, regardless of what the UP election would have thrown up, the budget would have been one of patronage and obfuscation. But, and let me repeat this, if you have an eye on the markets, what happens on 16 March shouldn’t worry you much. A profligate budget could see a sharp reaction for a day, or two or even a week. But after that liquidity will ensure that we will remain afloat, at least in the short- to medium term.

So what do I expect? The finance minister will be keenly aware that everybody will be looking at the number he puts out on the fiscal deficit. So he is going to come up with an acceptable number that also looks somewhat believable: say, 5.2 percent of GDP for the next year. To get to that number, without really pruning his outlay on subsidies, he is going to assume that the economy will grow faster than last year, say, at 7.5-8 percent.

Inflation, he will say, is coming under control, so he will possibly work on a 7 percent number for inflation through the next year, the same as he did last year. He makes these assumptions quite easily and I am sure he sincerely means them. But just let’s take a look at what he based last year’s budget arithmetic on and compare that with what he is likely to land up with in reality.

He assumed growth at 9 percent, inflation at 7 percent and set himself a disinvestment target of Rs 40,000 crore. Pegging his revenue assumptions on these numbers he laid out expenditure that would have given us a very acceptable fiscal deficit of 4.6 percent. In truth, though, unplanned expenditure has run away, growth has slowed to about 7 percent and average inflation through the year is likely to be above 9 percent, and the fiscal deficit as a result could be as high as 6 percent of the GDP.

Last year the polite reaction in TV studios was that the finance minister “seems over-optimistic on growth”, but there was hope then that the government would work towards achieving the needed growth. This year any such assumptions will be met with utter incredulity.

It is going to be interesting to see where the finance minister is going to peg the oil subsidy and how he chooses to deal with its accounting. The poor man has no control over oil prices and seems to be finding it difficult to have a say in where the rupee will go, so the oil subsidy is going to be a moving target. However, finance ministers have, through the years, found creative ways to defer accounting for the subsidy to the future, so the number in any case is unlikely to have much sanctity.

He will say that rising oil prices and a global crisis will put a spoke in his growth assumptions, but he will not say that growth would not have fallen off sharply if the government had done something about investor sentiment.

He will be optimistic about the disinvestment target once again and could even peg it in the fineprint at last year’s Rs 40,000 crore. If asked, he will explain that the buoyant markets will make selling public sector shares easy. What he won’t say is that in any case he can always count on LIC and other cash-rich PSUs to pick up shares in case the markets don’t oblige.

As he turns to Part B of the budget that deals with the government’s tax proposals, he is going to point out that the parlous state of the country’s finances does not give him leeway to make too many concessions. He will, therefore, most likely roll back the indirect tax concessions that he granted in 2008-09 as part of his economic stimulus package.

There will be announcement of another deadline on the goods and services tax (GST) and individual taxpayers could get some relief as the finance minister raises the income-tax exemption limits towards what has been suggested in the Direct Tax Code that is expected to be in place by 2013. But don’t expect a big jump in tax relief.

The Vodafone tax case could grab some headlines. In the past, finance ministers have passed clarificatory amendments with retrospective effect to lay claim to taxes that have been denied them by courts. It is unlikely that the budget will attempt to reclaim the Rs 11,000 crore tax that was set aside by the Supreme Court as the government has gone for a review. However, there will be amendments to plug the loopholes that saw Vodafone win a favourable judgment in this case.

So I am afraid I am not optimistic that we will get a budget that will spur growth. I would love to be proved wrong though. So what would I like to see?

3. The fiscal deficit credibly being brought down to 5 percent
4. A definite timeline for GST, the Direct Tax Code and the Land Acquisition and Mining bills.
5. A roadmap for the UID and cash transfers.
6. A credible statement on administrative reforms that will remove official discretionary powers.

Am I hopeful that we will get any of this. On the last, perhaps, as that will be touted as intent on the part of government to fight corruption, but for the rest, no.

See Firstpost’s Budget 2012 videos and expert views: Ajay Shah , Rupa Rege Nitsure , Indranil Pan , Ashima Goyal , Jim Walker , DK Joshi , Ajit Ranade , Art Woo .

See Firstpost’s Budget 2012 issue based videos: Subsidies , Fiscal Deficit , Inflation , Taxation.