Finance Minister Pranab Mukherjee proposed trimming the government’s subsidy burden and called for speeding the pace of economic reforms,which have been stalled by political gridlock,in his budget speech on Friday.
He set gross tax receipts in the fiscal year starting in April at 10.8 trillion ($214.35 billion),total expenditure at 14.9 trillion rupees and net market borrowing at 4.8 trillion rupees.
India Inc reactions: COMMENTARY
A. PRASANNA,ECONOMIST,ICICI SECURITIES PRIMARY DEALERSHIP,MUMBAI
I don’t see any populist schemes,but this not a reformist budget either. It is a status quo budget. I think the political compulsions made them decide that the best way is to play it safe – neither populist nor reformist.
DARIUSZ KOWALCZYK,SENIOR ECONOMIST AND STRATEGIST,CREDIT AGRICOLE CIB,HONG KONG
We are disappointed with the budget because it assumes a relatively high,5.1 percent deficit in the 2012/13 fiscal year. We also think that growth target is a bit too optimistic while inflation may have hard time falling as much as they are assuming.
The budget is negative for the INR,because high twin deficits and high inflation (boosted by large government spending) may discourage some foreign investors. It is also negative for government bonds. RBI has a bit less rate cut room now,although we still expect a cut in April.
N.S. VENKATESH,HEAD OF TREASURY,IDBI BANK,MUMBAI
It is clear the government is trying to come back to path of fiscal consolidation. And once inflation eases,it will provide RBI with space for acting on interest rates.
I think the RBI will continue with bond buys through open market operations to ensure their is no disruption due to government borrowing. It is also possible that we may see a 25-basis-point cut in cash reserve ratio in the RBI’s April policy review.
RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI
The market borrowing target looks difficult to achieve. So far,I don’t think the budget proposals inspire confidence that there will be enough revenue generation.
Bonds have reacted negatively because they (market participants) do not see much credence in the borrowing plan.
The fiscal situation will adversely impact the monetary policy. The pace and timing of monetary policy easing does look uncertain. I think the RBI may announce a token 25 basis points of rate cut in April just to boost investor confidence,but I am not sure.
SAILESH K. JHA,HEAD OF ASIA STRATEGY,SKANDINAVISKA ENSKILDA BANKEN,SINGAPORE
The numbers that are being set by the government,I think the market is taking it as too optimistic,and that is the reason the bonds have sold off.
We maintain our view that the fiscal deficit for 2012/13 would be well above target at 6 percent of GDP.
JONATHAN CAVENAGH,FX STRATEGIST,WESTPAC,SINGAPORE
The market was hoping for a lower deficit for the next financial year,so disappointing from that perspective. India continues to have the largest fiscal deficit within emerging Asia,hence expect this to weigh on the rupee.
ANJAN BARUA,DEPUTY MANAGING DIRECTOR,GLOBAL MARKETS, STATE BANK OF INDIA,MUMBAI
I think market can absorb this borrowing number. I expect bond and swap rates to remain rangebound in the near term. The current fiscal year was a difficult one for the economy,but I expect next fiscal to be better. Uncertainties should be less and therefore tax revenues will be buoyant. In that context,the government should be able to stick to its borrowing schedule in 2012/13.
SIDDHARTHA SANYAL,CHIEF INDIA ECONOMIST,BARCLAYS CAPITAL,MUMBAI
This fiscal deficit number for 2012/13 looks much more credible. Last year the net borrowing number was 4.75 trillion rupees,so it is marginally higher in 2012/13. Last year all the budget projections looked rosy,but this year they are more realistic.
ASHISH VAIDYA,EXECUTIVE DIRECTOR AND HEAD OF INTEREST RATES,UBS,MUMBAI
They (the government) had no option for the borrowing. Given the fiscal situation,I would not expect a rate cut in April monetary policy.
I am not sure whether the Reserve Bank of India will be conducting open market purchases of bonds,it depends on their intervention in the forex market.
I expect the 10-year yield to be 8.47 percent by March-end.
SAUGATA BHATTACHARYA,ECONOMIST,AXIS BANK,MUMBAI
The market borrowing programme is significantly higher than expectations,which is negative. This is not the best we had hoped for,but I think it is manageable with the Reserve Bank of India’s open market operations. It is not a huge concern.
ABHEEK BARUA,CHIEF ECONOMIST,HDFC BANK,NEW DELHI
What has effectively happened is that a large share of the fiscal deficit,which is above 80 percent,is to be funded through the market borrowing. I think the 10-year yield will cross 8.40 percent,and will move to 8.50 percent,given that the borrowing is larger than what was estimated.
Federal bond yields and overnight indexed swap rates rose sharply after the government set its fiscal deficit target for 2012/13 at 5.1 percent of the gross domestic product.
The 10-year benchmark bond yield rose to 8.42 percent,up 9 basis points from its level before the deficit estimate was released.
The benchmark five-year swap rate rose 6 bps to 7.61 percent,and the one-year rate rose 7 bps to 8.22 percent.
The main share index and the rupee were broadly unchanged from beforehand.
– The budget comes against the backdrop of low expectations,with the ruling party,battered in recent state polls and hamstrung by slowing economic growth and high global oil prices,in no position to advance bold economic reforms that could unclog flagging growth in Asia’s third-largest economy.
– The central bank left interest rates on hold on Thursday and warned of resurgent inflation risks,putting pressure on the government to trim the fiscal deficit.
– Inflation picked up for the first time in five months to 6.95 percent in February,although the number remains below the central bank’s end-March projection of 7 percent.
– Production at factories,mines and utilities in January expanded 6.8 percent from a year earlier,the highest since June 2011 and from market estimate of 2.1 percent.
– But growth in Asia’s third largest economy fell to 6.1 percent in the quarter ended December,the weakest pace in almost three years,data released in February showed. ($1 = 50.3850 Indian rupees)