India’s Finance Minister Pranab Mukherkee, 73, announced India’s 2009/2010 budget earlier this week.
The budget seems largely aimed to address the rural poor who returned
the Congress-led coalition to power. Consequently, the government is
extending the rural debt waiver plan that was first announced in 2007.
Also, the rural employment guarantee scheme that provides 100 days of
work for impoverished farmers got a huge boost in the new budget of
144%.
Highlights of the budget:
- Fiscal deficit raised to 6.8% of GDP, up from 5.5% forecasted in the February interim budget (6.0% in FY08/09) and against market expectations of 6-6.5%. Total expenditure will rise 36% (y/y) to INR10.2tn, largely financed by rupee-denominated debt.
- Gross market borrowing projected at INR4.51tn, up from the interim budget estimate of INR3.62tn and against market expectations of INR4tn.
- No clear roadmap on fiscal consolidation. The government plans to achieve its 3% fiscal target ‘at the earliest’; plans to introduce fiscal reforms to control future deficits. Deficit projected to remain above target until FY11/12.
- No rollback of fuel subsidies. Instead, another study panel will be set up to review the current fuel pricing mechanism.
- No major reform or pro-market initiatives announced. Greater ‘people participation’ is encouraged, but disinvestment of banks and insurance companies was ruled-out.
- Fiscal support for rural and infrastructure sectors stepped up, but there were no new major fiscal measures announced for other sectors.
Commentators have widely said that government has failed to provide a clear path towards fiscal consolidation and postponed tough decisions on subsidies; the budget speech further dented hopes of swift reforms and privatisation after the UPA’s election victory.
The overly optimistic medium-term economic forecasts underpinning the fiscal projections in the February interim budget were toned down, but the balance of risks remains skewed towards further deterioration in the fiscal outlook given the rather upbeat forecasts.
While the revised trajectory calls for above-target deficits until FY11/12, post-budget comments by ratings agencies suggest a negative rating action might not be imminent.
Market participants were clearly disappointed. The stock market index closed down 5.8%, while US-Rupee exchange rate rose 1.4% to 48.56.