India’s election-eve interim budget provided hardly any succour for investors, save the automobile sector that has been stuck in reverse gear for several months, but deep-pocketed foreign funds continued to pour cash into the stock market indicating that they are willing to shrug off near-term turbulence and bet on the long haul.
The sub-continent’s $2 trillion economy, Asia’s third-largest after China and Japan, is in the throes of a sharp slowdown, with data showing manufacturing activity contracting for three consecutive months. As government finances are in disarray due to steep increases in subsidy bills and sharply lower-than-expected revenue, the country needs out-of-the-box initiatives to boost growth.
That can only happen if general elections due by May produce a new government with a clear mandate. Opinion polls indicate the business-friendly Bharatiya Janata Party (BJP)-led alliance is the front runner to garner the largest number of seats, but it’s unclear whether it would muster a clear majority on its own.
“It’s a Catch-22 situation for the big boys who stake out mega dollars,” said equity strategist V. Venugopal. “The money trail shows underlying confidence in an economy that has tremendous potential but needs a strong leader who can remove the cobwebs and unleash the entrepreneurial spirit within.”
As foreign funds bought shares worth a net $330 million (Dh1.2 billion) over seven sessions, the top-30 Sensex climbed 1.6 per cent and the broader 50-share Nifty rose 1.8 per cent, both registering their best weekly gain since the third week of December. With the Sensex closing at 20,700.75 and the Nifty at 6,155.45, there should be more gains in the coming week if the inflows keep up the momentum.
GDP growth for the December quarter will be released on Friday and the data is unlikely to be flattering given the battering that manufacturing has taken. So, there could be bumps along the way.
To have optimism is a good characteristic. It helps to brave the Himalayan challenges that India faces to rein in wasteful expenditure, clean up the deficit mess, cool price pressures and bolster growth.
However, the odds are stacked against any easy options. Take for instance Finance Minister P. Chidambaram’s claim of holding the fiscal deficit to 4.6 per cent in the current financial year ending on March 31, below his budget target of 4.8 per cent. It was achieved by shifting Rs350 billion of the fuel subsidy bill to the next year and taking one-off income from state companies.
“It is hardly a secret that this has largely been achieved by pushing back expenditures and moving forward tax and dividend collections. It, therefore, implies that the targeted fiscal consolidation will be more difficult to come by next fiscal year,” said Leif Eskesen, chief economist for India & ASEAN at HSBC.
Chidambaram patted himself in the back and assured investors that by keeping the fiscal deficit below the “red line” would remove the threat of a sovereign ratings downgrade. However, the way this was achieved through the sleight of hand and heavy cuts of some Rs798 billion in investment spending poses a bigger problem in the new financial year beginning April 1.
“The quality of the consolidation — for a second successive year — was worrisome, with tax revenues missing targets by hefty margins, disinvestment targets being offset by extra-ordinary dividends from public enterprises, and plan expenditures being slashed by 0.7 per cent of GDP,” JP Morgan analysts Sajjid Chinoy and Toshi Jain wrote in a report.
“All this makes next year’s consolidation that much more challenging.”
The finance minister was also exuberantly optimistic about the targets he set for 2014-15, such as fiscal deficit of 4.1 per cent of GDP and budgeting subsidies almost unchanged in absolute terms even though payments for right to food security are set to surge as also for fuel and urea. He also expects divestment proceeds of Rs570 billion, a tough proposition given that New Delhi has managed just Rs250 billion in each of the last two years.
For investors and economists these targets have no reflection of ground realities. A full budget will be presented to parliament in July by the new government, which would undoubtedly chart out a completely different course. More than belt tightening, there will have to be strong policy initiatives to boost investment in a big way.
Until then the takeaways from the interim budget are primarily for makers of motorcycles, scooters, cars, sport utility vehicles and trucks, as well as auto-parts producers. The auto sector has been in dire straits with high taxes adding to the gloom. Recognising the problem Chidambaram cut duties across the board for the sector.
The excise duty on small cars, motorcycles, scooters and commercial vehicles has been cut to 8 per cent from 12 per cent, while for large and mid-segment cars the levy has been lowered to 20-24 per cent from 24-27 per cent. This should help companies such as Maruti Suzuki, Tata Motors, Hyundai Motors, Hero MotoCorp and Bajaj Auto.
Mahindra and Mahindra, the biggest Indian maker of utility vehicles, would be the biggest gainer from a reduction in excise duty on SUVs to 24 per cent from 30 per cent. Auto-parts makers like Motherson Sumi should also gain from the duty cuts. However, the duty relief is only until the end of June, and it would be the new government’s call after that.
What is likely to sour the outlook is the possibility of interest rate increases. The International Monetary Fund said on Thursday it expected India’s consumer price index to hover near double digits into next year driven by food prices, necessitating tighter policy.
The consumer price index touched a two-year low in January at 8.79 per cent as food prices cooled but was still much higher than the wholesale price index of 5.05 per cent, an eight-month low.
The IMF expects India’s consumer price index to remain near double digits well into next year driven by food prices.
“The ingrained nature of inflation and inflation expectations mean that reducing inflation — even over a protracted horizon — will require significant increases in policy rates, which will weigh on growth,” the IMF said in a report.
India’s economy is likely to expand 4.6 per cent in 2013-14 and growth should pick up to 5.4 per cent in the following year, the IMF said.
The writer is a journalist based in India