DSIJ Mindshare

Budget 2013: Beyond The Smokescreen

When the Finance Minister presents the budget, a whole nation listens in anticipation. Will he increase taxes? Will he bring down subsidies? What happens to economic growth? Will the markets tank? Questions and more questions surface and float around until the big day, when the minister discloses what’s in store.

This year has been rather different. The return of P Chidambaram to the Finance Ministry after a gap of almost 4 years marked a turnaround in sentiments across the board. Overall, there was hope that the economy will now return to the growth path, that reforms will be carried forward in right earnest and that there will be enough reasons for the markets to cheer.

Having assumed the driver’s seat at the North Block, Chidambaram instantly delivered on the expectations. Reforms began rolling in at a faster clip, the economy looked like it was reviving itself and getting onto a higher growth path, and the financial markets rejoiced as worries seemed to be dissipating. The result of all this was obviously a huge buildup of expectations from the big event – Budget 2013.

The character of the budget, particularly in a year to be followed by elections, is more or less a foregone conclusion. Lots of public spending, hordes of projects and crores spent on wooing the voter. So, while the FM was expected to come out with a populist budget, the challenge remained to see how he would exercise fiscal prudence, which was the need of the hour.

Well, the statesman that he is, Chidambaram delivered something which commentators and experts have dubbed as a good attempt at juggling both aspects. Malvinder Mohan Singh, Executive Chairman, Fortis Healthcare says, “The budget has pulled off a good balancing act by containing the fiscal deficit to 4.8 per cent and provides what the country needs at the current juncture”.

But a closer look at what has actually come out reveals a rather pale attempt at masking the compulsions of sovereign financial management. There is nothing in the budget which can conclusively brand it as good or bad. In fact, there is tremendous disappointment following the gap in what was expected and what has been delivered.

So, what is the government’s plan of action for the next financial year? Will the budget really yield any of what it is expected to? Are the proposals practically achievable? How will the government’s balance sheet shape up after such a budget? Here are some answers which should clarify why we believe that this budget lacks any practical applicability in the current circumstances.[PAGE BREAK]

The Income-Expenditure Divergence

At the fundamental level, there seems to be a big mismatch between the potential earning capability and the estimated spending. Look at the spending plan. The FM’s intent is to spend Rs 1665297.32 crore in FY2013-14, which is almost 16 per cent more from that spent in FY2012-13. Having said that, the fiscal deficit for the current year, which is expected to come around 5.2 per cent of the GDP, is estimated to be reined in at 4.8 per cent for 2013-14. Does that sound realistic?

This gets even more ambitious going ahead. The fiscal deficit is to be brought down to three per cent of the GDP by 2016-17. Now, this is where there seems to be a disconnect between intent and feasibility. Simple economics has it that in order to be able to spend, you first need to earn. An overleveraged position eventually leads to bad economics as we are witnessing in the European countries.

In his own words, the FM has very clearly spelt out the little room that is available “to give away tax revenues or raise tax rates in a constrained economy”. While this is the scene on the direct taxes front, it is not very different with respect to indirect taxes. The normal rates of excise duty and service tax haven’t been changed. The peak rate of basic customs duty on non-agricultural products has also been left unchanged. So, where are you going to earn from? By liquidating government assets? Well, is that the most prudent way of funding expenses? We don’t think so.

R Shankar Raman, CFO, Larsen & Toubro shares our scepticism, “From where we were in FY12, the announcement of 3000 km of road projects is welcome and interested companies will lap it up. But the challenge is how to convert these targets into implementable plans. In terms of programmes and intent, the budget proposals have got some of them on priority, but I don’t know where the money is going to flow from”.

Every step that has been initiated by the FM in his budget this year has very limited applicability in terms of the quantum that has been offered. It seems to be like a half-hearted attempt at satisfying every quarter and at the same time ensuring that fiscal prudence isn’t overstepped.

While this is what has happened on the broader front, here are some more pointers to what the FM has done and the impact that the provisions will have on the broader parameters particularly of interest to the markets.[PAGE BREAK]

Ensuring Liquidity And Foreign Money Flows (FIIs & FDIs)

Last year (CY12), the Indian equity market gave a return of 25 per cent, which is the best among the emerging markets. One factor behind such returns was definitely the reforms process that began at the end of the second quarter of the current fiscal. But what really played a pivotal role was the huge surge of liquidity into the Indian markets, for which FIIs remained the prime source.

FIIs pumped in around Rs 128000 crore in 2012, and this year too, the flow hasn’t ebbed. On a Year-to-Date basis (February 28, 2013), they have brought in a net Rs 45600 crore into Indian equities. In our pre-budget story, we had mentioned that the FM needs to ensure that there are no negative surprises that inhibit money flows, particularly those from FIIs. As it turns out, though, the budget did throw up a scare and FIIs ran helter skelter on the very day the budget announcement was made, signalling what could happen if a remedial announcement doesn’t come out soon.

The announcement which spooked the markets was with reference to the Tax Residency Certificate (TRC) clause. The budget proposes to amend Sections 90 and 90A in order to provide that submission of a Tax Residency Certificate is an important but not necessarily a sufficient condition for claiming benefits under the agreements referred to in these sections. The FM did provide some clarifications on this front the next day, but only to defer the impact until the Finance Bill comes out in entirety.

In fact, this provision was as announced last year. However, it was to be made applicable only April 1, 2013 onwards. The same has now been made applicable retrospectively from April 1, 2012. The confusion which began with GAAR last year has now seeped into the current provision. It would obviously make FIIs nervous and result in them pulling out funds. This could further hurt the markets. To put this in perspective, on the budget day itself, FIIs pulled out as much as Rs 1274 crore.[PAGE BREAK]

What is being sought by introducing this provision? Tax authorities stand to gain unfettered control on questioning investors following a change in this provision. Will it help the exchequer? Well, we would know the instant some case comes up. Until then, the provision has managed to keep the markets in suspended animation and probably waiting to suck out a whole lot of liquidity that actually drives the markets.

However, as we said earlier, the budget is a half-hearted attempt at everything it has sought to address. So, there are some positives on the liquidity front too. In a major positive for intraday traders, the Securities Transaction Tax (STT), the transaction cost which matters the most, has something good to offer: 

  • In the equity futures segment, STT is slated to come down from 0.017 per cent to 0.01 per cent.
  • For Mutual Funds (MF) and Exchange Traded Funds (ETF) redemptions, STT would be cut from 0.25 per cent to 0.001 per cent.
  • In the case of purchase or sale of MFs and ETFs on exchanges, STT would be reduced from 0.1 per cent to 0.001 per cent (to be applicable only on the seller).

This move will reduce transaction  costs marginally. For instance, the currently transaction cost, which includes Brokerage (assuming it to be around 30  paise), Service Tax and STT,comprises around 0.353 per cent of the contract value. This will now be 0.346 per cent. In absolute terms, for selling one lot of equity futures, traders would save around Rs 20.30. Although this looks small, it will definitely be a positive for traders and arbitragers. The F&O segment contributes to around 90 per cent of the turnover and hence it is a positive from the markets’ perspective and liquidity.

In addition to this, the FM has also levied a Commodity Transaction Tax (CTT) on non-agricultural commodities futures contracts at the same rate of STT, i.e. 0.01 per cent. This move will create a level playing field between the equity and commodity markets. Some funds are likely to flow to the equity markets now, but we believe that there would hardly be any significant shift in the flows from commodities to equities as the tax levied is negligible, and as a result, the overall transaction cost in commodity transaction would rise from 0.037 per cent to 0.047 per cent (including CTT).

Further, with a view to increasing liquidity and retail participation in the equity markets, the government has liberalised the Rajiv Gandhi Equity Saving Scheme (RGESS), which now looks a bit better than the mere eyewash it had seemed in its earlier avatar. The tax deduction has been extended from a period of one year to three years. The income limit for eligibility has also been raised from Rs 10 lakh to Rs 12 lakh, which would result in a higher number of participants. We believe that the RGESS now looks somewhat promising as compared to what it did earlier, but the lock-in period part continues to be a major overhang and investors would still ask why they should remain invested perforce for three years.[PAGE BREAK]

Factors Impacting The Interest Rate Scenario

High interest rates have for long remained a major concern. While this is hardly news, the most important factor that needs to be considered now is how the government will fund its ambitious outlays. The budget lay very little stress on tax and non-tax revenues. This essentially means that a whole lot of funding will be sought through borrowings. Larger the government borrowings, the bigger will be the crowding out effect, thereby resulting in finance becoming dearer.

Here too, there is a small positive takeaway in that the FM has kept his promise and has targeted to rein in the fiscal deficit for FY2014. Adi Godrej, Chairman, Godrej Group is optimistic in this regard. He says, “The Budget meets most of our concerns regarding fiscal consolidation, investment incentives, and inclusive growth. It is good that fiscal deficit has been maintained below the target at 5.2 per cent for 2012-13 and at 4.8 per cent for 2013- 14. Budget 2013-14 promises to adhere to the fiscal deficit roadmap as laid out by the Finance Minister last year”.

Managing the deficit was the need of the hour, and this is a good point taken. If the deficit targets are achieved or if it comes below the estimation, it would bring down the interest rates in due course of the year. However, one big question that we would like someone from the Finance Ministry to answer is what exactly will bring the deficit down? There are no clear measures that have been spelt out as yet on this front.

In absolute terms, the net borrowing has been increased by 3.6 per cent for FY2014. If the government exceeds this borrowing estimate, it would have a negative impact on the yield curve. However, if it manages to stay on course or borrow lesser than estimates, as it has done this fiscal, the yield curve would come down and this would be a positive for the economy.

The real impact on the yield curve and interest rates could come from the monetary policy. Inflation is showing signs of moderation, and if the twin deficits are brought under control we may see the Reserve Bank of India (RBI) slash the key rates and bring down the overall interest rates.[PAGE BREAK]

Impact On India Inc.’s Financial Performance

Having talked about the interest rates, which is one of the most important factors impacting the financial performance of India Inc., there was a major announcement in the budget which will have implications on the performance of corporates. This was with regard to a proposal for an additional surcharge of 10 per cent to be levied on companies with a taxable income of more than Rs 10 crore.

With most of the companies already facing margin pressures, the additional surcharge would naturally result in the net margins shrinking further. The impact of this is not expected to be much, though. Out of more than 5000 companies in the listed universe, only 712 fit into this criterion. If we calculate the exact impact this surcharge could have, the average tax rate comes to around 37.20 per cent as against 33.80 per cent currently.

On the valuations front, considering the financial performance of India Inc. in the December quarter of 2012, the FY13 consensus EPS for Sensex-based companies is estimated at Rs 1310, while for FY14, it has been pegged at Rs 1490. Considering the impact of the surcharge, the estimated EPS for FY14 would be around Rs 1475. Hence, there is hardly any major impact of this surcharge to be seen on the performance of India Inc. Even at an EPS of Rs 1475, the forward P/E works out to 12.80x. This still provides a good chance of an up-move to the Sensex from its current levels.

Valuations play a pivotal part while investing in stock markets. Valuations are themselves largely dependent on the financial performance of corporates. The announcements made in Union Budget 2013 will clearly impact corporate financial performance. Though the Indian economy had started picking up, with the September quarter of 2012 showing signs of a revival, the performance of India Inc. was below the street’s as well as our expectations in the December 2012 quarter. Going ahead, the performance of India Inc. will play a pivotal role in how the markets pan out. How Indian corporates fare in the March quarter of 2013 as well as in FY14 holds special importance.[PAGE BREAK]

Apart from what we have mentioned earlier, there are hardly any direct announcements that have come up in the budget which will impact the financial performance of India Inc. But there are certain indirect factors. At the very core is the expected GDP growth. The FM has raised concerns about slowing global economic growth and its impact on India. In fact, he has categorically stated that getting back to the potential growth rate of eight per cent is a challenge facing the country. So, it is clear that the he is concerned about putting the Indian economy back on a high growth track. Sadly, there is no mention about how he thinks India will really grow going ahead.

What adds to the worries is the lower-than-expected GDP growth of 4.50 per cent clocked in the third quarter of FY13. Without any concrete plans laid down in the budget, it now seems to be even more difficult to achieve higher growth.

Financial performance is highly correlated with GDP growth, and if that gets hampered the financials too tend to go downhill. Even a GDP growth of 6.10-6.50 per cent for FY14, as mentioned in the Economic Survey, seems to be realistic and could help India Inc. get some breather. Usually, the PAT growth of India Inc. comes in at around 2.5x of what the GDP growth figures are. This means that 12-15 per cent growth on the bottomline front can be comfortably managed in FY14. In these uncertain times, this seems to be a fairly good number.[PAGE BREAK]

Factors Affecting Monetary Policy

The monetary policy has been one of the key issues that the equity markets have been chasing for more than a year now. The market sentiments tend to change according to the monetary policy announcements. The high borrowing costs have put a good amount of pressure on corporates to hold back their capex plans. This, combined with high inflation, has impacted India Inc.

The RBI however, has, trained its gaze strictly on inflation, giving low importance to growth. Recently, following the dwindling GDP numbers, it did slash the repo rates by 25 basis points, indicating that growth may take centerstage again. The third quarter GDP at 4.5 per cent, though, is far worrisome as growth has fallen to a decade’s low. In this backdrop, the budget impact on some factors will shape the RBI’s monetary policy going forward.

In the budget session, the Finance Minster acknowledged that the widening Current Account Deficit (CAD) has been a worrying factor, leaving no room for the RBI to cut rates. The government is now trying to reduce the so-called ‘twin deficits’, i.e. Fiscal Deficit  and CAD, to provide some headroom to the RBI to cut interest rates further. In FY13, the government’s external borrowing increased by 7.1 per cent over the FY12 figure. Nonetheless, immediately after Budget 2013, the RBI said that the government’s borrowing target for FY14 is quite manageable. This lends some air of positivity to the overall budget and its correlation with the monetary policy.

The CAD, however, is a more important factor that puts pressure on the rupee. In fact, the rupee has already depreciated in FY13 due to a rise in the CAD. As the external environment has worsened, India too has faced a slowdown in exports. Increasing oil imports, gold imports and rising coal demand are the main reasons that the country has been seeing a higher CAD.

The obsession of Indians for gold is another big worry for the government, which it needed to address urgently. However, all measures in this direction have already been put in place way before the budget. To curb the demand for gold, the government had increased the import duty on the metal from four per cent to six per cent on it in January 2013 itself. Another important move in the budget is the government’s intent of issuing inflation indexed bonds.
These could well help to beat inflation and prevent higher gold imports, which are considered as a good hedge against  rising inflation today.[PAGE BREAK]

Liberalisation Of Controlled Sectors

The government has been taking minor steps with respect to the liberalisation of controlled sectors on an ongoing basis. Insurance and retail are two sectors in which the government had already announced the allowability of FDI earlier, and hence, there was nothing in the budget. Deregulation of diesel prices too had happened prior to the budget. Hence, a major part of  what could have been expected in this regard has already been done outside of the budget.

The only initiative the government has taken in the budget was opening up the coal sector for Public Private Partnership (PPP). Having witnessed the coal scam in 2012, the government has finally decided to liberalise the sector. The country needs a huge amount of coal to fund its upcoming projects and there is incremental coal demand from the power sector as well. Hence, PPP in coal would be a favourable move going ahead. In the oil & gas sector, the government has decided to bring in shale gas to India. But it all would depend on how well the execution of the intent happens.

On The Disinvestment Front

Riding high on the recent disinvestment of NTPC and Oil India, Chidambaram has set an ambitious target of garnering another Rs 54000 crore during FY13-14. This comes as a surprise, as it was expected that the next fiscal target on the divestment front would be set at Rs 40000 crore. Biswajit Mohanty, MD & CEO, SBI Pension Funds opines, “While expenditure has been increased by 16.50 per cent, fiscal deficit projections would appear achievable if non - tax revenue mobilisation remains on track (divestment, spectrum sale proceeds) and expenditure remains in control”.

How will the government achieve this? For starters, it has some minority stakes in non-government companies under SUTTI (Specified Undertaking of the Unit Trust of India), which the government may sell. Beside this, it wishes to sell some minority stakes, particularly in BALCO and Hindustan Zinc, to mop up around Rs 14000 crore. It need hardly be mentioned that the government has no control on these companies as they are under Vedanta Resources.[PAGE BREAK]

Secondly, the government is fully committed to generate Rs 40000 crore from the disinvestment of various PSUs, for which work is in progress on a war footing in the Department of Disinvestment (DoD). In fact, the DoD has already received an approval from the Cabinet Committee of Economic Affairs (CCEA) for the disinvestment of RINL, EIL, BHEL, Hindustan Aeronautics (HAL) and Neyveli Lignite. Sources in DoD are indicating that for the next fiscal, the list also includes Indian Oil, Power Grid, NHPC, THDC and NEPCO.

Within these, the biggest ticket would be the disinvestment of IOC and the IPO for HAL. The government presently holds 78.92 per cent stake in IOC, and to adhere to the minimum public holding norm, it has to offload around four per cent. It is also looking to offload stakes in Coal India, and that again would create history like its IPO did. All in all, there are around 20 companies in the tentative list of PSU disinvestment.

The government seems to be overly relying on disinvestment receipts to tame the fiscal deficit. Will it succeed? Well, it will surely be watched at every step.

Caution, Roadblocks Ahead

If you have looked at what the FM has given out in the Union Budget 2013, none of the announcements seem to conclusively have the potential to put us back on a rapid growth path. In fact, there is pain waiting to spring at every corner and it would be better for all, especially investors to tread carefully and not be a part of any euphoria which is surely to be short-lived.

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The Budget 2013 saw a number of announcements related to the Banking Sector. Here’s what Rana Kapoor, Founder & CEO, YES BANK and President (Elect), ASSOCHAM, has to say about the Budget and its impact on the sector.

How do you rate the Union Budget 2013-14?

The Finance Minister has delivered a balanced budget, refraining from any big bang announcements and instead opting for multiple pragmatic initiatives with a focus on socio-economic development and resuscitating growth, thereby ensuring fiscal prudence atop economic priority. The expected fiscal consolidation in 2013-14 has been laid out by a combination of expenditure switching investment driven measures.

As always, the industry and individuals tend to over expect from the Budget, given the constraints of the economic space as the FM very lucidly said, “I do not think there could have been better developments because there are a lot of growth injections across the board particularly the investment benefit to restore confidence in building and investing more in the future.

On roads, the establishment of road regulator and the fact that 3000 km of roads are quite visible in relatively safer states. The specific declaration regarding the initiation of two smart cities out of the seven in the Delhi-Mumbai Industrial Corridor (DMIC) and the Gujarat and Maharashtra plans turning into reality after almost five years of DMIC planning are a welcome announcement.

The two southern corridors also make up for some good news. Some rationalisation of the period for power projects will help in risk mitigations. The booster on agriculture is almost like 2.5 times investment in the eastern hemisphere of the country and a new allocation for agriculture for helping crop diversification.

Additionally, the budget retained its focus on agriculture, with the MSMEs to set the pace for sustenance of growth. Given the sheer importance of the number of households dependent on these sectors, backed by a strong focus on skill development and healthcare sectors, will create incremental employment opportunities. The government has allowed MSME units to continue to enjoy benefits/preferential treatment for a period of three years even after it grows out of the category thereby also ensuring higher competitiveness and better flow of finance to MSMEs.

To provide greater credit to MSME, the budget doubled the refinancing capability of SIDBI to Rs 10000 crore and provided Rs 500 crore to set up a Credit Guarantee Fund. On the agriculture front, the budget announced Rs 1000 crore allocation for the Green Revolution in East India, and Rs 500 crore allocation for crop diversification, to support persistent rise in agricultural output.

On the whole, it is commendable that through the budget the Finance Minister has strived to create ‘economic space’ in a difficult environment, while adhering to fiscal prudence and ensuring stability and sustainability.

I would rate the budget at 8.5/10.

What impact does the budget have on the banking sector?

The overall growth injectors, particularly across the infrastructure sectors, where the overall risks have heightened, offer an additional impetus to the micro SME entities in an indirect way. This in turn acts as a further booster for diversity, geographic as well as crop diversification over a bountiful harvest of almost 250 million tonnes. This will gradually entail an improved credit risk environment for banks to get out of their cautious mode and kick start lending. An overall support to the investment climate has also been aptly underscored not only by the industrial corridors like the existing DMIC and the proposed CBIC and BMIC, but also by paying attention to the MSME, Agribusiness, hi-tech model cities, and Infrastructure sectors.

Besides, after dissuading physical gold investments by raising duties on gold import earlier, Chidambaram has taken a step to its logical end by incentivising financial savings so as to lower the pressure on the unsustainable current account deficit.

The relaxation in limit for the Rajiv Gandhi Equity Savings Scheme (RGESS) by Rs 200000 will attract more retail investors to the capital markets while the additional interest deduction of Rs 100000 for home loans up to Rs 25 lakh will not only promote home ownership, but also have a strong positive multiplier impact on the economy through inter-industry multiplier linkages.

More importantly, the future introduction of Inflation Indexed Bonds is a practical solution for protecting the interest of savers from the impact of high inflation. This has the potential to become a viable alternative to physical savings, which has often played the role of a hedge against inflation in India.

The Union Budget 2013-14 has pragmatically addressed the concerns on the current mild growth, lackluster investor climate and unsustainable current account deficit within the ambit of credible fiscal consolidation. More importantly, it has managed to lay the framework for both DTC and GST.

I believe that this will provide the beginning of a virtuous cycle for the Indian economy for a target GDP growth of 6.5 per cent in 2013-2014.[PAGE BREAK]

As the Budget 2013 saw the FM announcing measures to encourage investments, we have Nirmal Jain, Chairman, India Infoline (IIFL), expressing his views on the budget and what more could have been done to help the economy.

How would you rate the Budget 2013?

The Finance Minister has done a commendable job of presenting a prudent Budget that achieved its fiscal deficit target and maintained stability in rates. It would be one of those few Budgets presented before the General Elections without any significant populist measure to appease the vote bank. Confining the deficit would have succeeded in allaying country rating downgrade fears, for the time being at least. While some targets of income generation like service tax and non-tax revenue appear stretched and containing subsidy would be a challenge, but overall the FM has provided a roadmap, which is achievable and not over-ambitious either.

Has Chidambaram managed to meet the industry expectations? If not, what has been missed out?

Given the constraints of limited resources, the Budget attempts to kickstart the investment cycle and this is laudable. Maintaining a stable rate regime is a welcome step. Of course, a surcharge on the super rich and the corporate tax will increase payout to an extent but there is no additional burden on the middle class and the super rich should not mind paying a bit more when the country’s finances are in a difficult state. The one thing that was not needed was an amendment to the Tax Residency Certificate, when the country needs to rope in FDI and FII, and while memories of GAAR are still fresh in investors’ minds. The FM has done his job; the performance of the economy will now depend on policy reforms and execution of promises on removing hurdles for investments.

What else do you feel could have been done to make the Budget more impactful?

The FM has admitted that the ballooning Current Account Deficit (CAD) was more of a concern than the Fiscal Deficit. That being the case, I am surprised that nothing really was announced to address the issues of high CAD. The FM’s steps to encourage financial savings left a lot to be desired. In times of falling savings rate, the need was a substantial increase to Section 80C. This would also have made gold relatively unattractive. Instead, he has only offered an additional interest deduction up to Rs 1 lakh for those first-time home loan takers up to Rs 25 lakh, besides a Rs 2000 tax credit to people in the income brackets up to Rs 5 lakh.

Not much was done on the equity investments front either. Rather than simplifying the Rajiv Gandhi Equity Savings Scheme (RGESS) for the debutante retail investors’ community, he has merely increased the investment amount and the time period under the said scheme. The FM also chose to bank on higher tax revenues and asset sales to achieve the fiscal deficit target of 4.8 per cent for the next year. A more credible strategy would have been to keep non-plan expenditure under check.[PAGE BREAK]

With rating agencies reviewing various economies and stamping them with a particular number, we have Atul Joshi, MD and CEO, Fitch Group speak to DSIJ about his views on the Union Budget 2013-14

How do you rate the Budget 2013?

In terms of the sovereign ratings, what is important is the reigning fiscal deficit. The way we define the fiscal deficit is different from what the general perception of the calculation. We add back the divestment and the bonds that are issued. This is why our fiscal deficit may be slightly wider than what the ministry has reported. The bonds that we add back comprise of oil bonds and fertiliser bonds. So, from our perspective, it is a good thing that by controlling the expenditure, he is able to bring the fiscal deficit to 5.2 per cent as against 5.7 to 5.8 per cent.

The other thing that we have observed is that it gives the RBI the required flexibility to play around the interest rates. This is very important from an economist’s perspective. On the taxation front, I think the FM could have done more. The bigger worry for India though, is the lack of resilience in its earnings. If we analyse the debt to GDP ratio, it is one of the highest in the world, is at 340 per cent. If you look at Brazil or a couple of other emerging markets, it is around 130 to 150 per cent. The other problem is the tax to revenue ratio; we are at about 12 per cent, whereas the BBB median is around 26 per cent. We have voiced our concerns that the government must do something to increase the tax base, which is not by raising the tax rates, but by widening the net.

Do you think that the FM has played a diplomatic card keeping in mind the General Elections 2014?

Given the constraints, I think he has done a good job. On a standalone basis, I will say that he could have done much more. With the policy and liquidity constraints, you cannot jump start the economy. It is like an anaemic person who has to complete a marathon and we are expecting the economy to start running. But an anaemic person cannot do that; firstly he has to recover, gather the required strength and then start walking and at last start with the marathon.

One thing that needs to be highlighted is that the FM has  suggested some very good ideas on the infrastructure front that have gone unnoticed. He has talked about two model cities coming up in the Delhi-Mumbai freight corridor. Model cities means that there will be a huge rush of infrastructure. We know that a lot of Japanese companies are interested in this. What is lacking is the government’s will to materialize it. Once the clarity is achieved, building of the three waterways that he has announced will kick start. One more thing which is not in the public domain is the laying of gas grid. Once it materialises, the subsidy on LPG will vanish.

Do we have enough leverage to do get involved in such social spending?

I think he will do what he has done this year, that is to hold back the expenses if the revenues do not come according to his expectations. That’s the leeway he has, which he has exercised already. Let us also not forget that he is sitting on an amount of Rs 115000 crore borrowed from the Central Bank. So while he has budgeted the borrowing, he may not need to actually borrow too much. How much growth do you see for India, going forward? We would put it at 6.1 per cent for the next fiscal and for the year after that, it would stand at seven per cent.

Foreign agencies are somewhat sceptical about India. What is your take on that?

It is more because of the negative news that we spread. If you look at the banks’ NPAs, it is not too much of a problem. Considering the macro potential indicators of India by Fitch, we have rated it at one, which is at the least risk, Singapore is at two with a moderate risk, worse than India and Hong Kong is at three, which is most prone to risk. We would place China at three too, and France at two. There are many big economies that are doing worse than India as far as the macro indicators are concerned. We have overdone our negativity.

What is your take on inflation?

Food inflation is a myth in terms of its root cause. I frankly believe that there is a supply side constraint. I would view that in two parts - One is the lack of availability and the fact that supply is available at a very high cost. What good does this budget do to us? There are two aspects of this. One is the laying down of reforms, and thrust on the urban infrastructure, it’s a minimum 15 years’ project and there will be a lot of expenditure making the project a self propelling one. On the road construction side, setting up of a special authority is a positive sign. On the power side, he has said that we need to look at the SEBs and an entire recasting of it.

On a scale of one to ten, how do you rate the budget?

I would give it an eight.

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