I would like to start by commending Finance Minister P Chidambaram on his presentation of a balanced, growth oriented budget on Monday. A macro positive for themarkets is that he has brought down the twin deficits.
At the same time, the Budget has announced further measures to improve financial efficiency and financial stability. The fiscal deficit target has not only been maintained within 4.8 per cent of GDP, but has actually been lowered to 4.6 per cent of GDP. For the coming year, the target of 4.1 per cent of GDP is in line with mediumterm goals.
With the current account deficit expected to halve to 2.5 per cent of GDP, the twin deficits have been effectively contained at a time when global growth is slowing. Needless to say, this should be a major macro plus as global investors have been majorly concerned about high twin deficits.
Fiscal consolidation should prevent any further downgrade by international rating agencies, especially in the absence of any clear mandate after the general elections. We are already seeing the Indian rupee hold on relative to other emerging market peers.
The bold initiatives taken by Governor Rajan in recouping forex reserves and shifting to inflation targeting has helped in instilling investor confidence into the economy. The constant communication with investors did have a positive impact in which the rupee has bucked the trend relative to other EM currencies. Overall assumptions for the Budget seem reasonable.
As the FM has targeted a relatively low fiscal deficit, there is also some scope to accommodate some slippage if absolutely necessary. Against this backdrop, the economy appears more stable today than what it was two years ago. In my view, the worst for the economy is over. I would expect growth to bottom out to 5.4 per cent in the coming fiscal from 4.8 per cent in 2013-14.
Sensex earnings are also expected to recover to 15 per cent from 10 per cent this year. Although India has been impacted in the present slowdown like most other emerging markets, we are clearly ahead in the pain-cycle, as we are raising oil prices and interest rates. The government’s gross borrowing programme of about Rs 6,00,000 crore (excluding Treasury Bills) is in line with market expectations.
The finance minister has, in fact, improved on his budgetary projections for borrowing this year. A lower level of crowding out, coupled with the ongoing peak-off in inflation, should, over time, create headroom for the RBI to cut rates, especially if the rains are normal. I am happy to learn that the Cabinet Committee on Investment and the Project Monitoring Group has fast-tracked projects 296 projects.
After all, growth will return to solid ground only when investment picks up. Budget 2014 has decided to support growth by cutting excise duty to the extent possible within the overall push towards fiscal consolidation. Relief to the automobile industry, by almost 4 per cent, should help to turn it around, and also further the development of India as an auto hub. This will also make up for the strict control of plan expenditure.
Increase in defense expenditure will also help development of the domestic sector and attract FDI. I also welcome the number of steps envisaged to deepen the Indian financial markets and promote financial stability.