Photo: AP Images
The Indian government unveiled its budget for 2012 – 2013 on Friday and received a rather tepid response. It announced a new deficit target of 5.1 per cent of GDP and projected growth rate of 7.6 per cent.The budget also called for raising excise duties at a time when the economy is near a cyclical low.
We wrote last week about taxes on gold imports included in the budget to curb the current account deficit. And there was a a fleeting mention on reforms including consultations with state governments to arrive at a consensus on FDI investment in multi-brand retail.
We fished around to see what analysts thought of some of the reforms and targets in India’s budget. Most were critical of the lack of clarity about reforms in the budget and their ability to stimulate growth.
Leif Eskesen, Chief Economist, India & ASEAN, HSBC Global Research
Eskesen told Bloomberg TV the government would lean towards populist policies given the political environment and that it would be difficult to achieve the 5.1 per cent deficit target:
“Some of the assumptions they’ve built into the budget in terms of growth, in terms of what they can achieve in terms of privatization and to some extent also what they can achieve in terms of subsidy reductions they might be a little too optimistic. But at the end of the day when we fast forward one year we’re probably going to be above what they ultimately target in terms of deficits, so a little bit more slippage but probably not as much as the current fiscal year.”
Though O’Neill said he expects a positive surprise to official forecasts for the Indian economy and is optimistic about the growth of the Indian consumer, he was disappointed by the budget reforms:
“I found it extremely hard to get worked up about anything either way. It didn’t really offer much to get excited about or much to be disappointed about either. From a big picture perspective, given that India scores poorly relative to each of the other three BRIC nations, it is a disappointment that they repeatedly seem to fail to seize the opportunity to boost productivity and improve underlying finances. Unlike all of the other seven Growth Market economies that would each walk into a top class Swiss standards monetary union of fiscal respectability tomorrow, India would have to make do with the one that exists in Europe.”
“A dependence on corporate tax revenue and vulnerability to commodity prices and exchange rates weakens the government’s credit profile. And the fiscal 2012-13 budget’s lack of specific policies to address these weaknesses is credit negative.”
Moody’s said the budget was a mixed bag for corporates, with some initiatives like the exemption of import taxes on thermal coal supporting certain companies struggling with fuel shortages and rising coal prices. But a two to five per cent increase in taxes on vehicles would hurt automakers.
Other key criticisms include two budget measures that are aimed at the recapitalization of public-sector banks but that would fail to offset the worsening fiscal balance of the government.
“India’s budget for the fiscal year ending March 31, 2013, would be mildly negative for the unsolicited sovereign credit rating on India (BBB-/Stable/A-3). While the finance minister announced various fiscal reforms, the timing of the implementation of key reform measures such as the Goods and Services Tax (GST), Direct Tax Codes (DTC), and the targeted direct subsidy disbursement remains uncertain. In addition, India’s deficit in the next fiscal year is likely to remain high, and uncertainty surrounds the path to subsidy consolidation and to lowering fiscal vulnerability to volatile commodity prices.”
Jefferies analysts Nilesh Jasani and Piyush Nahar thought the budget did a good job in its attempt towards fiscal consolidation but thought it lacked a defining idea or measure to address the Indian economy’s structural problems.
Jasani and Nahar are positive on the subsidy projections in the budget because of their improved transparency and the absence of additional subsidy programs in connection with the food security bill. But they are more critical of the budget’s failure to address growth:
“Where the budget has done the biggest disservice to itself is in not aiding future growth at all. Growth revival at this key juncture needs substantial policy support. In our view, we have an environment where people were ready to believe and vote with investments. The budget’s failure opens the downside growth risks due to structural deficits, hidden bank losses, a collapsed investment cycle and rising oil prices.”
Fitch thinks the government’s subsidy cap of 2 per cent of GDP would be positive for the country but that there are risks to the government implementing the cap ahead of parliamentary elections in 2014. Fitch was also critical of the tax reforms in the budget.
“The budget speech indicated that two new measures to enhance revenue take that go beyond typical administrative measures to increase efficiency in tax collection – the introduction of a goods and services tax and a direct tax code – remain in the pipeline. However, the continuing absence of a clear timetable for adoption, while not a surprise, means that these reforms, which could help secure fiscal consolidation if domestic or external risks increased, will continue to be delayed.”