Our markets live on hope and thrive on speculation. The week beginning today would be a great example of this. The Railway budget would be presented on Tuesday the 26th of February, followed by the Economic Survey on Wednesday the 27th of February and ending up with the Union Budget on Friday. To provide further volatility and complete a highly speculative four days, February futures expire on Thursday as well.
The economy has its sets of problems like the fiscal deficit, inflation, interest rates, GDP at 5% its lowest level in the last 10 years and to top it all general elections next year. This is notwithstanding the fact that the threat of a sovereign downgrade continues to hang over our heads. The Finance Minister had made a road show at four places in Hong Kong, Singapore, London and Frankfurt where he met FII’s and assured them that the fiscal deficit would be maintained at 5.3% for the current year and at 4.8% for the year 13-14. He has also assured these investors that there would be a stable tax regime and no populist measures. These figures would be maintained for all that they are worth. What next?
The economy needs to be revived so that we are back on the 7% plus growth rate sooner than later. This would help as revenues would rise and like the markets say all is well. Currently raising revenues is a challenge as excise duties saw a large across the board revision just last year and are already aligned for the period when GST would kick in. A little bit of tinkering on the STT front where the same would be reduced on the delivery side and increased on the speculative side. To make a level playing field the possibility of introduction of CTT is almost a certainty, but these matters would not have any effect on the market beyond 48 hours at best.
If the FM is to be remembered for what he did and the budget for 2013-14 is to go down as one that made a difference to India, he has to do something big on the infrastructure front. By big I mean on all aspects of infrastructure whether it be spending, debt raising, investments, and incentives for investing or setting up infrastructure. We all know that interest rates are likely to soften provided inflation continues to ease. Proper or better infrastructure would help in no mean manner. To achieve fiscal deficit if plan allocation or spending on the same is reduced, we would have killed the possibility of revival itself.
I believe the key to a successful budget, something that could benefit the nation and hence the markets on a sustainable basis would be impetus to Infrastructure. The government needs to increase spending on this sector and to do so need funds. Higher plan allocation, higher inflows on debt from overseas to fund infrastructure, encouraging public-private partnerships in infrastructure projects, fast tracking clearances for such projects under a special ministry or single window, giving incentives for investing in long gestation infrastructure projects with a larger lock-in on lines better than the RGESS scheme. In short the theme of the budget should be Infrastructure, Infrastructure and Infrastructure.
What would this achieve? We would be able to kick start the economy and have it ready for the next phase when the infrastructure to capitalise on the growth is needed. Raising resources is a concern as we do not have the means to provide for the same. However as we have seen FII’s are prepared to invest money in the country even through debt, hence dedicated debt funds for infrastructure or direct debt for specific projects would help. With many developed countries struggling to have a positive GDP, investing in a country likely to grow at 7% plus would certainly help all stakeholders. There are very few investment vehicles available for savings and investors within the country are looking for opportunities. Tailor made products providing a lock-in, assured returns and longer duration products yielding reasonable returns would be welcome.
Besides infrastructure there is talk of the sugar industry being decontrolled. This would have a positive impact on the sector and affect the government controls of India’s largest state Uttar Pradesh which is ruled by a non-Congress government. This could serve a dual purpose and seems quite likely.
In conclusion, keep your fingers crossed, hope that the FM bites the bullet and takes tough measures to stimulate the economy and not just look at vote banks. We would know wha has happened in a mere four days from now.
