By Dwayne Ramakrishnan, EconomyWatch.com.
In the aftermath of India’s Union Budget 2010 announcement the Wall Street Journal, increasingly vitriolic as it has become under Rupert Murdoch, said that investors had reacted with a yawn to Finance Minister Pranab Mukherjee’s presentation.
How gratifying then that the key Indian stock market index, the Sensex, had it’s best two day rally for more than two years, beating even last year’s post election buzz. The market today crossed 17,000, the first time it has done so since it slumped at the start of the year. Take that, WSJ.
One of the experts on Emerging Markets investing, Mark Mobius, who manages over $34 billion of assets mainly in BRIC (Brazil Russia India China) countries for Templeton Asset Management, helped to explain the surge by saying that India will outpace other emerging markets in the next few years.
“India’s macroeconomic fundamentals have significantly improved ... The government have done a good job of managing the economy through the recent crisis. Unlike companies in the US and Europe, most companies have healthy balance sheets and strong cashflows” in India.
Financial Institutional Investors (FIIs), such as Templeton and other domestic and international funds, have driven this move. The Economic Times reported that FIIs have been net buyers of shares worth Rs 2,644 crore, equivalent to US$562 million, since the budget. This was a major turnaround from their pre-budget stance, when risk aversion drove them to be net sellers of Rs 117 crore of stocks.
There has been praise for the budget thanks to a greater sense of fiscal discipline than in previous, where the focus often seemed more about buying votes that stewardship of India for future generations.
S. Srinivasan likened Mr Mukherjee’s budget performance to a magician performing the Great Indian Rope Trick from the turn of the last century.
First the goodies came out, which was like the rope going up in the air.
He ‘thrilled’
Then for the trick. As
the crowd listened in a trance, Pranab Da climbed down to the ground and implemented his real agenda: fiscal consolidation and discipline. He took back almost double of what he gave away in direct taxes through indirect ones. He made a sweeping attack of the petroleum sector – the cash cow that it is – to raise additional revenue. He adopted afiscal stance even more conservative than the 13th Finance Commission which had pegged 2010-11 fiscal deficit at 5.7 percent of gross domestic product. Mukherjee committed to keeping it within 5.5 percent, as much as 1.2 percentage point less than the current year’s level. In the process, he rolled back many of the economic stimulus measures given in the last budget on the grounds that the economy has now recovered.
Even the highly sceptical Financial Times said the sums were probably correct.
This means that the government will now need to borrow less money from the market, Rs 345,000 crore as against Rs 400,000 in the past year. This will mean less ‘crowding out’ of much needed private investment. On that theme, it was also announced that Foreign Direct Investment (FDI) limits will be reduced in some key sectors, but more details were not forthcoming.
It all sounds pretty promising then, so why is there wailing and nashing of teeth coming from some experts?
One area is agriculture, the sector of the economy that supports most of India’s population. Loans and longer repayment dates help, but last year’s Monsoon was devastating for many regions. They helped to expose deeper structural problems that require something like a Green Revolution Part 2 to solve. There needs to be more technology deployed to help farmers improve yields while using less resources, and only the government can push through this initiative on the scale needed.
The greatest, talk, however, has been around taxation.
To understand the discussion, we need to look at what was recommended by the 13th Finance Commission, a government committee that, by law, recommends reforms to the Finance Minister and President.
This committee had recommended moving to a course of fiscal discipline to reduce India’s governmental debt load, and those recommendations appear to have been accepted - let us hope for the long term.
In order to support sounder government finances, the 13th Finance Commission also requested a study of taxation reform, specifically whether India should move to a unified Goods and Services Tax (GST, also known as VAT) structure. This study was led by Suman Bery, Director General, National Council of Applied Economic Research, New Delhi, India.
In it, the NCAER argues that in India a taxation policy that maximizes economy efficiency while minimizes distortions is vital. Because so much of the population work as small cropholder farmers, they do not pay personal income tax, which is a key form of direct taxation. Even if they made enough to be taxed, simply trying to collect it would be a massive drain on resources, breaching the first requirement of efficiency.
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