The Telegraph
Since 1st March, 1999
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Forget the ritual...
'and take care of growth. That is the big moral
For us, India is looking good: A trader disguised as a nun jokes in front of a board displaying the German share index DAX on Carnival Tuesday at the Frankfurt stock exchange. (AFP)

After hemming and hawing all through the budget speech, the sensex finally made up its mind that its exceptionally low expectations had been adequately met and staged a relief rally.

But even as the frontline stocks rose, the broader market reflected the true impact, or the lack of it, of the budget ' the BSE Midcap index fell 0.22 per cent, while the Small Capindex went up 0.22 per cent. On the BSE, declines beat advances 1370 to 1113. FMCG, capital goods and banking stocks led the rally. The BSE Oil & Gas index fell by over a percentage point, because of the disappointment that nothing has been done over oil subsidies.

In truth, there wasnít much in the budget to enthuse the market. The minimum alternate tax has been increased and so has the securities transactions tax (STT). Arbitrage volumes are likely to be affected with the hike in STT. The Lahiri and Rangarajan reports havenít even been mentioned. And surely the governmentís emphasis on rural development and infrastructure had already been factored into FMCG, cement, construction and capital goods stocks'

Yet the market brushed aside all that. The sops to the market were few ' the relaxation for mutual funds investing abroad is unlikely to make a difference. A few excise cuts, such as for small cars or for textiles, will help some companies. Banks will benefit from the inclusion of 5-year deposits under Section 80C of the IT Act ' theyíll be able to repay their high-cost deposits, bringing down their cost of funds and their maturity mismatches will reduce.

But the big positive, especially from the point of view of the foreign investors, is the reduction in the fiscal and revenue deficits. With the government back on to the Fiscal Responsibility and Budget Management Act roadmap, a major concern has been addressed.

There are two reasons why this is important. One of them is the fact that the prime reason for the rise in the savings rate to 29.1 per cent of GDP is because the public sector savings rose from a negative 2 per cent in 2001-02 to a positive 2.2 per cent in 2004-05. With the government reducing its deficit, the savings rate as well as growth will increase even further. The second reason is that the reduction in the deficit will reduce the pressure on interest rates, because it wonít need to borrow so much.

How was the finance minister able to keep the fiscal deficit at 3.8 per cent' The main reason, of course, is that the denominator, GDP, is going up. Itís what many economists have been saying all along ' take care of growth, and the deficit will take care of itself.

Coming to the numbers, the minister has projected a rise of 10.9 per cent in total expenditure, compared to an increase of a mere 3.3 per cent last year, but then last yearís numbers were distorted by the fact that the figures for 2004-05 included the proceeds from the debt swap scheme.

Both capital and revenue expenditure are budgeted to rise by 10.8 per cent each, which is rather remarkable. But growth in revenue expenditure is lower, which is a good sign. On the revenue side, tax revenues are expected to rise by 19.4 per cent, well below the 21.9 per cent growth this year. Much of the growth is budgeted to come from corporation and service taxes, although Corporate Indiaís earnings growth is expected to slow down.

However, interest rates are unlikely to stop their northward journey solely because the deficit is lower.

The key reason for the low level of liquidity going forward will be the higher current account deficit, which will offset liquidity coming in through foreign inflows. That can only go higher if the budget gives an impetus to growth, as it is meant to do.

As for the market, since much of the higher expenditure has been earmarked for the social sector, itís unlikely that all of it will translate into demand growth for companies. Earnings growth will slow and valuations will get more expensive. India is currently the most expensive market in Asia, apart from Japan. But then, how many Asian economies can boast a 12 per cent nominal growth rate'

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