India's Union Budget FY 2013

 

The run-up to the Union Budget has seen a plethora of ‘experts’ (bankers, corporate executives, investors, economists, journalists, etc.) voicing their opinion of what the Union Budget FY2013 should look like. The Union Budget is probably the most hyped up event in the economic calendar. From being a simple event of the government declaring the profit and loss account of the public finances, it has undergone a metamorphosis, whereby the government now provides a snapshot of the nitty-gritties of the economy, policy ingredients, and guidance for the next fiscal year. Nobody gains from this parliamentary Budget session as much as the media. In fact, judging by the past few years, the Budget has been more of the TRP (Television Rating Point) event than a GDP (Gross Domestic Product) event.

 

Budget Day in India is somewhat of a close follower of the British counterpart. For many years in Britain, the Chancellor of the Exchequer ceremonially enters the House of Commons with a Victorian-era ‘budget box’ briefcase. In similar fashion, Indian Finance Minister Pranab Mukherjee clutched his red leather briefcase as he entered the Indian Parliament building. Mr. Mukherjee presented India’s 81^st annual Budget on March 16^th; Individually, it was his seventh, the second highest by any Finance Minister in India. Several ‘experts’ were hoping the budget would introduce the much-awaited reforms that would spur economic growth, and bring back the investor confidence. The key reforms anticipated by the markets included:

1. A revamp of Tax-structure by introducing Goods and Service Tax (GST) and a Direct Tax Code (DTC)
2. Allowing Foreign Direct Investment (FDI) in sectors such as Aviation, Retail, and Insurance
3. Trimming the fiscal deficit
4. Removing infrastructure bottlenecks
5. Breakup of the state-run Coal monopoly
6. Cutting back on subsidies (Fuel, Fertilizer, and Food)
7. Maybe even some tax relief for the middle class

However, one doesn’t need to be a genius to realize that making everybody happy was impossible. The FY-2013 Budget, like most of its predecessors, stuck to the age-old trend of taxing consumption, raising taxes for existing taxpayers to pay for the handouts given to the impoverished, bail-out ailing sectors, and optimistically talk about reforms to come. The emphasis was on Inclusive Growth, with increased spending on agriculture, healthcare, and education. Little wonder that his choice of literary quote was from Hamlet: “I must be cruel, only to be kind”, compared to Dr. Manmohan Singh citing Victor Hugo in 1991, “a reformed and confident India was an idea whose time had come”.

The FM started his budget speech reminding everyone of the tough global economic environment (high oil prices due to tensions in the Middle East, European Crisis, the usual suspects really). Then he moved on to present India’s economic performance. FY2012 GDP growth rate pegged at 6.9%, compared to 8.4% in the previous year. GDP growth for FY2013 expected to be around 7.6%. Then he moved on to talk about fiscal consolidation, saying that issues regarding public finance – something that investors and the RBI have been demanding for quite some time now – would be addressed. The fiscal deficit, targeted at 4.6% of the GDP, was likely to be around 5.9% for the year ending March 2012. However, factoring in the states’ deficit, and off-balance sheet items, the overall deficit could touch 9%. He announced the target for next fiscal year to be 5.1% (and below 4% in 3 years), which would be achieved on the back of increased service and excise taxes, and subsidy expenditure reduced to 2% of the GDP (and 1.7% in 3 years) from about 2.7% now. It also set a divestment target of Rs 300 billion for FY2013 compared to its FY2012 target of Rs 400 billion, of which it only managed to raise Rs. 139.1 billion (through an FPO of Power Finance Corp. and a 5% stake auction on Oil &Natural Gas Corp.)

He also tried to excite the financial markets by proposing Qualified Foreign Investors (QFIs) access to Indian Corporate Bond Markets; and incentivize greater participation by retail investors in equity markets through Rajiv Gandhi Equity Savings Scheme, which would give them 50% income-tax deduction upto Rs. 50,000. Then he announced that small investors could e-vote in companies. Obviously their e-vote would not be sufficient to stop the Government from looting PSUs (Remember ONGC?). Furthermore, he lowered the Securities Transaction Tax (STT) to just 0.1%.

Mr. Mukherjee then moved on to talk about the bottlenecks in the economy:

• Provided Rs 158.88 billion for recapitalization of public sector banks, regional-rural banks, and other financial institutions like National Bank for Agriculture and Rural Development (NABARD)
• Allowed another Rs. 600 billion worth of tax-free bond issuances to fund infrastructure projects
• Cut customs duty on imported coal to ensure fuel supply for power generation
• Directed Coal India to sign long-term Fuel Supply Agreements (FSAs) with Power plants
• Allowed Airlines to raise more foreign loans (ECBs) for Working Capital
• Allowed ECBs for Capex Requirements of Infrastructure Projects (more specifically, power projects, roads and highway projects)
• Set up a Credit Guarantee Trust Fund and allowed ECBs for Low-Cost Housing Projects to address shortage of affordable housing in many cities
• Provided for Telecom Towers to get viability gap-funding
• Increased funding for National Rural Health Mission (NRHM) to Rs. 20.8 billion
• Announced a “White Paper” is being prepared to deal with on black money (illicit funds) stashed both, at home and abroad
• Increased Defense spending by 17% to Rs. 1.93 trillion
• Provided Rs. 255.55 billion to the Right to Education, a 21.7% yoy increase, and also proposed setting up a Credit Guarantee Fund for students

Finally he spoke about Taxes. On personal taxes, he enhanced the basic limit for tax exemption to Rs. 200,000, and expanded the 20% tax slab upto Rs. 1 million. The new tax slabs is illustrated below. Furthermore, there would be no separate tax slabs for women. Interest-income upto Rs. 10,000 from savings account in banks or post offices would now be tax-free. But custom duty on Gold and Platinum were increased (understandably so, to curb gold imports and to channel that money into more productive areas of the economy). Additionally, Sin tax increased on some tobacco products.

 There was no change in corporate tax rates. Broadly, service taxes and general excise duties were hiked to 12%. However, peak excise duty remains unchanged at 10%. This surely would be inflationary as services account for 59% of our GDP. I have compiled a chart to illustrate which goods or services will now cost more and which will cost less.

Overall, Union Budget 2013 was expected to deliver big-bang reforms. But all it had to offer was the traditional mix of more public spending and reshuffled taxes, none of which will be revitalize the stalled engines of economic growth. However, one announcement that was big bang in nature was that of General Anti Avoidance Rules (GAAR), a proposal to amend tax laws to retroactively levy capital gains tax on Indian assets (even on deals that take place abroad by foreign entities). This would apply to transactions as far back as April 1962. It appears that the amendment is principally aimed at taxing Vodafone, but this could well scare off foreign investors – the same people who fund India’s current account deficit; the same people that the Indian Government has been trying to woo.

Brief Background on Vodafone Case:

The British telecom giant bought an Indian operator from Hutchison Telecom of from Hong Kong in an offshore deal in 2007 for $11 billion. However, the Supreme Court of India, in January 2012, ruled that Vodafone should not have to pay a $2.2 billion tax that the Indian government claimed.

Later in the day, Mr. Mukherjee tried to explain that the government was only clarifying the 1962 tax law, and trying to close a loophole that allowed some companies to structure transactions in tax-havens such as Mauritius, purely to avoid paying any capital gains tax. “We are making it very clear that it is the law of the land — this is the intention of the legislature,” he said on NDTV, a news channel.

My Reaction

  

The Union Budget continued with the present Government’s theme of Inclusive Growth. Thankfully however, it refrained from announcing any extremely populist measures, especially considering its poor performance in recent state elections. Instead, it focused on fiscal consolidation. However, no big-ticket reforms were announced either. It seems like whatever additional revenues they’re raising will all be diverted to welfare programs and wasteful subsidies. So in short, our government continues to play Robin Hood.

The government has missed targets before. Furthermore, the last 2 quarters have seen so many revisions that government estimates can no longer be considered a reliable source. There is something really wrong with the way the official statistics are calculated and maintained. Hence pardon my cynicism but I’d take these Budget numbers with a pinch of salt too.

One major takeaway is that the government has missed an opportunity to deliver reforms and jumpstart the productive engines of the economy. I was not expecting the budget to deliver too much, but at least a few reforms were desperately needed. Politics is once again driving the nation at the detriment of economics.

We witnessed this two days ago as well, when a coalition ally Ms. Mamata Bannerjee, populist leader of West Bengal based Trinamool Congress, demanded the Railway Minister (who belongs to her own party) to be fired. 

His crime? Proposing a fractional rise in rail fares to modernize Indian Railways and improve its safety and hygiene. The rail budget was forward-looking, and the fare-hike was very modest, ranging from 2p – 30p per kilometer (or 0.04 – 0.6 cents per km); the fares had not been revised since 8 years. But by proposing this, Rail Minister Mr. Dinesh Trivedi had apparently “gone against the Trinamool Congress Party’s DNA” and that was unacceptable. Imagine their reaction if the government proposed privatizing the railways.

With such obstructing allies, it would be near impossible for the Congress to carry out any significant reforms even if they had a stomach for them. Another problem is that India Inc is a spoilt bunch that loves to sulk; hence business and investment climate will not improve until some policy action from the government. This budget failed to do that. The measures announced were marginal at best. It didn’t help RBI either. The central bank is terrified that inflation would pick up again, reflecting a host of supply-side constraints ranging from agricultural supply chain to inadequate infrastructure.

So what should the Budget have focused on? Even taking baby-steps, but in the right direction, can go a long way to fixing things. In addition to all that Mr. Finance Minister announced, he should have formed a Priority Group to maneuver the following:

1. Raise diesel prices, incrementally and quietly, but offset that by matching cuts in the tax on diesel. That way, the fiscal hole starts getting plugged, and the consumers don’t feel much of a pinch.
2. Set-up a facility to fast-track land acquisition and environmental clearances. This would kick-start the implementation of stalled projects, which would create employment along with boosting infrastructure, and housing markets, financial markets, and business sentiment – and all this without investing a single new penny.
3. Present a draft on GST and DTC, outlining how the overall economy (include every stakeholder) would benefit from it. Start discussions with an established deadline for the rollout.
4. As of now, India has only 790 diplomats and ambassadors, compared to about 3,000 in Brazil, over 6,000 in China, and well over 20,000 in America. While this may not have much of a direct impact on Indian’s finances (except their payrolls), it does increase India’s presence in different nations. This not only helps in economic ties, but also strategic ties. For a nation trying to strengthen its global footprint, India is severely under-represented on a diplomatic level.

In a separate post, I would like to share 2 open letters addressed to Finance Minister Pranab Mukherjee in response to his budget announcement. They sum up pretty well how some segments of the economy will be affected. A transcript of his BS (I mean Budget Speech) can be found here:

http://indiabudget.nic.in/ub2012-13/bs/bs.pdf

The ONGC Divestment Debacle

Imagine a situation where you are about to buy a product, which costs Rs 100, and the seller is desperate to sell it off. However he is selling it at Rs 120, despite the product having several plaguing issues. Would you still buy it, knowing that the seller is so desperate to sell this product that it may well sell it for Rs 80 a few weeks later? 

I wouldn’t.

Something similar happened at the ONGC’s (Oil and Natural Gas Corp Ltd) share auction on Thursday, March 1^st. For the benefit of some readers, let me start with the backdrop. In the last Union Budget, the government had planned to sell a stake in several state-owned companies, aiming to raise Rs 400 billion, but unfavorable market conditions prevented them from doing so. The only stake-sale that went through successfully was an FPO (Follow on Public Offer) of Power Finance Corp., which fetched the government Rs 11.45 Billion. Simply put, the government only managed to achieve 2.9% of its divestment target for the year. Furthermore, the economic slowdown resulted in tax revenues falling short of expectations. But its expenditure bill on the multiple welfare schemes only ballooned. Hence, hard-pressed for funds, and with the fiscal deficit target getting topped already in 10 months ending January, the government made a desperate attempt to sell some stake in ONGC Ltd through a share auction (the Indian Government seems obsessed about auctions) just weeks before this year’s Union Budget.

The government’s frantic attempt to narrow the budget deficit through an untested divestment method was near disastrous. Up for auction were 428 million shares, at a floor price of Rs 290 per share; this equated to a 5% stake in the nation’s biggest energy explorer, valued at Rs 124 billion. The auction started at 9:15 am, but the lukewarm response was causing concerns among officials and merchant bankers alike. Until 3:20 pm, 10 minutes before the bidding closed, only 14.3 million shares were bid for, which is less than 3.4% of the total offer. To add to the theatrics, the websites of the two main exchanges, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), stopped updating the bidding activity on their respective websites at 3:20 pm.

Then, in typical Bollywood fashion, the last 10 minutes saw bids for 406 million shares, led by other state-owned entities such as State Bank of India (SBI) and Life Insurance Corp (LIC). Seven hours later, at 10:30pm, Government officials confirmed that the final demand from investors was for 420.3 million shares i.e. 98% of the total offer, and the average price received was Rs 303.67 per share, which was a 4.7% premium on the floor price of Rs 290. The total amount raised was Rs 127.67 billion, of which over 110 billion was coughed out by LIC alone, roughly 87% of the total amount. While the reason behind LIC’s last minute endeavor may be open for debate, the 377 million shares it bought increase its total stake in ONGC to 9.48%.

All said and done, the government only has itself to blame for the debacle. It had not put in adequate work to ensure that the auction process went through without any hiccups. Instead, it rushed through it, aiming to raise some quick cash, and hoping to show a lower fiscal deficit number in its Budget session of the Parliament, due in 2 weeks. However, now that the Divestment Department has established that the auction results were satisfying, and that an auction would be the method of choice for further divestments hence forth, the government can take away some valuable lessons from this episode.

The Price – Setting the floor price for the auction at Rs 290 per share was the government’s first mistake. Usually, when a firm tries to sell a stake to public, be it in the form of an IPO or an FPO (or an auction as in this case), they issue the shares at a discount. This is attractive, especially for the retail investors as it leaves some money on the table for them by giving them an opportunity to sell the stock in the secondary markets. When the floor price of Rs 290 was formally announced on Feb 29^th, it was at a 1.1% discount from the previous day’s closing price of 293.2.

ONGC Shares, up 14% in 2012 - A misleading benchmark perhaps?

However, what the government (or their advisors) failed to factor in was the wave of liquidity around the world in the last 2 months, which saw foreign investors pour in $7.2 billion (Rs 360 billion) in Indian equity markets, and another $4.8 billion (Rs 240 billion) in the debt markets. Such large inflows caused the ONGC stock to climb 14%. Hence, a more appropriate price would have been somewhere between Rs 260 - 270, the average price in the last few months, thereby offering an attractive discount from the previous trading day’s closing price. Just for the record, the share price as I write this piece is Rs 283 i.e. Rs 7 lost on every share from the auction’s floor price overnight. I wonder how LIC feels about its loss.

The Risks – Another reason why it would have been more prudent on the government’s part to auction at a discount is the operational risk underlying ONGC. In any economy, the nation’s largest energy explorer would be the darling of the investors. However, the case is slightly different in India; on one hand, over 80% of its oil is imported, but on the other hand, the government subsidizes the price of fuel. The problem (not to mention the current account deficit) for investors is that ONGC, being a state-run company, is forced to share a portion of the government’s subsidy burden. In fact recently, the government increased ONGC’s share of burden, and with oil prices edging higher (already above $125 per barrel), chances are that this ratio will increase much further.

 

In addition to the impact on costs and earnings, investors have also been worried about the ad hoc nature of the subsidy sharing arrangement. According to the Economic Times, the company’s subsidy burden for the first 2 quarters of FY12 was close to 30% of the oil marketing companies’ under-recoveries. However, in the third quarter (ending December 2011), the methodology was changed and the burden was calculated to be $56 per barrel, rising from 33% to 38% for the entire 9-month period, April - December. As a result, there was a steep rise of 47% in burden in a single quarter, and no assurances that the methodology wouldn’t change again in the future. Hence, with such uncertainty over issues that have a direct bearing on its profitability, a floor price of Rs 290 was totally unjustified vis-à-vis the underlying risk.

The Timing – The government has been teasing the markets with the idea of an ONGC FPO since December 2010. While the offering was postponed several times, a mere discussion about it stagnated the share price as investors were anticipating a discounted offering. So much so that the stock did not even react to developments such as a bonus issue and a stock split (both of which would otherwise cause a significant rally) in February 2011.

However, when the time finally did come, the government rushed through the process, in order to fill its coffers before the financial year ended. They neither gave themselves and their bankers enough time to market the auction, nor did they give the markets enough time to arrange liquidity to participate. The auction was held barely 48 hours after an official announcement. For a market where the average IPO size ranges between Rs 30 billion to Rs 50 billion, a much greater effort was required by brokers and investment bankers to sell an auction worth Rs 124 billion. Therefore, the government should have been more diligent and given themselves and the market about 8-10 days to prepare for the auction. Alternatively, they could have carried it out in multiple steps, for example, 4 auctions of Rs 30 billion each. This would have calmed some jittery nerves among investors, who fundamentally remain very bearish and indecisive due to several domestic and international overhangs (European Crisis, Slowing GDP, etc.)

All in all, I can see why the government tried to rush through the auction. I can also see why they set the floor price at Rs 290. In the grand scheme of things, ONGC is still undervalued at Rs 290; therefore longer-term investors wouldn’t mind the price too much. However, it is important that the lessons are learnt from this experience. I am convinced that we are living in a world where sentiments control stock prices (at least in the short term), and government interventions drive the economy. Hence the single most critical factor one should evaluate is the underlying risk – risk of a bad investment; risk of mismanaging a stake sale; risk of making a wrong decision. Come to think about it, it’s a life lesson isn’t it?

Update: According to news reports, the decline in ONGC’s share price over the last 2 days (post auction) has cost LIC Rs 9 billion.

Ouch !

India Macroeconomic Snapshot 2011

 

For almost 2 years, India’s Central Bank has been busy battling Inflation, even at the cost of Economic Growth. However, instead of being commended on their efforts to tame this stubbornly sticky inflation (which is clearly a product of Supply Constraints and Fiscal Mismanagement), the RBI has been heavily criticized for the slowdown in GDP growth.

In response to the slowdown, the RBI cut the Cash Reserve Ratio – the percentage of deposits that banks must keep with the central bank – by 50 bps (0.5%) in its review on Jan 24, a move that would release Rs. 32,000 Cr ($ 6.5 billion) into financial system. In his policy statement, RBI governor D. Subharao said, “the growth-inflation balance of the monetary policy stance has now shifted to growth, while at the same time ensuring that inflationary pressures remain contained”.

Slowing GDP Growth

According to the official estimates, the GDP grew at a mere 6.9%, compared to 8.4% in the previous year. The slowdown was mainly driven by the manufacturing sector, where growth slowed down from 7.8% last fiscal to a meager 2.7%. Other sectors have fared poorly as well with the Industrial output slipping into negative territory at -5.1% in October before bouncing back to 6.8% in November, mostly on account of a large base-effect. Strapped for funds, core infrastructure sector too saw dismal growth at 0.3%, owing to poor execution of projects.

Inflationary Pressures

Averaging around 9%, throughout the year 2011, headline inflation has been well above the comfort levels of the Government and RBI. While their desired range for headline inflation is 5 – 5.5 %, that range has continuously been breached every year since 2005 – 2006. However, much to everybody’s relief, Food inflation declined to lowest in 6 years (6 years – what a coincidence) albeit thanks to a strong base-effect, and seasonal impact. Since monetary actions take about 4-6 months to show results in the economy, there is some respite for 2012 for inflation to be contained. However, considering the risk of oil prices spiking up, the Central Bank will have to be extremely careful and ensure that inflationary headwinds have genuinely subsided before adopting any stimulus measures throughout 2012.

Burgeoning Fiscal and Current Account Deficits

Another alarming issue for the economy has been its mounting fiscal deficit. The previous Union Budget (FY 2011-2012) had set a target of the fiscal deficit at 4.6% of GDP. However, the fiscal deficit during the first half the fiscal alone was 85.6% of the full-year target. Hence, it is quite clear that the government is set to miss the target, and the deficit is more likely to be around the 5.2% mark, or perhaps more if oil prices rise and/or tax revenues decline (I believe that both events are highly likely, and a deficit of around 5.6% or more should not come as a surprise). With tax collections sluggish, and divestment ambitions foiled by poor market conditions, the government has no option but to borrow more to pay for its ever-growing subsidies bill. In doing so, it essentially mopped up most of the funds in the market, and crowded out private sector investments (i.e. increased interest rates by excess borrowing in the money markets). Rising oil and fertilizer prices and the implementation of the Food Security Bill are all going to further increase the subsidy burden for the government. With a tax base of less than 10% of the GDP, the picture doesn’t look very bright.

To make matters worse, high interest rates, big-ticket scandals, and the government’s reform-inertia had dampened the business environment to such an extent that manufacturing and industrial production plummeted. Exports growth was very trivial (due to economic slowdown in major export destinations), and was merely a fraction of the sharp growth in imports (thanks to robust domestic consumption demand), thereby worsening the trade balance. In addition to the worsening trade-balance, imports of Oil and a huge appetite for Gold (India imported 969 Tons in 2011) dented the Current Account Deficit even further. In fact, Oil and Gold together account for about 70% of the nation’s Current Account Deficit. Furthermore, high interest rates dampened corporate investments, and foreign capital inflows dried up too. All this put pressure on the nation’s foreign exchange reserves, which reflected on the Indian Rupee.

Currency Woes

2011 was a challenging year for the Indian Rupee, which depreciated 16% in 2011 (its biggest annual fall since 2008) and was the worst performing Asian currency of the year. Concerns about the rising fiscal and current account deficits amidst an uncertain global environment, loss of confidence in the Indian reform process, doubts over its growth momentum and stubbornly high inflation led foreign institutions (FIIs) to sell the Indian currency, pushing it to an all-time low of 54.30 against the US Dollar in the December.

The RBI refused to deploy India’s foreign exchange reserves to curtail this slide, as it was not a phenomenon that monetary action could fix alone. So RBI used alternative methods to curb speculation on the Rupee. It banned firms to enter multiple forward contracts to cover a single foreign currency transaction, and also eased rules for companies to raise offshore debt. It also raised the interest rates payable on deposits made by Non-Resident Indians. Also in December, India and Japan signed a $ 15 billion currency swap agreement. The RBI has pledged to keep a close eye on Rupee levels throughout 2012 as a weak rupee would further hurt imports, and on the flipside, exports won’t benefit much either owing to a global slowdown. In fact, firms that had resorted to foreign-currency debt in the form of External Commercial Borrowings, or ECBs (against a backdrop of rising interest rates in India), had to face tremendous pressure servicing that debt with the Rupee at such depressed levels. All in all, a weak currency would hence only add more inflationary pressure on the Indian economy.

Dominated by negative news-flow, such as the FDI in Retail debacle, or missed Divestment targets, criticisms of Policy Paralysis, failure of introducing GST, etc., 2011 was a year to forget for several investors, business leaders, and parliamentarians alike. So as we enter 2012, many “experts” will be hoping for the Union Budget in March to introduce crucial economic reforms. However, the challenges now are more complicated than they have been in recent years. Too much emphasis has been given to the role of RBI’s monetary policy, discounting the importance of the Finance Ministry (Fiscal Policy) in driving the economy. Personally, I expect FY13 to be much choppier than last year, and expect things to get much worse before getting any better. Considering the nature of coalition politics in India, any reform announced during the budget would come as a surprise, albeit a positive one.

Surprise Surprise.. Targets Missed.. Again !!

The purpose of this post is to recognize & be able to connect various dots, and draw a clearer picture of the issues that paralyzing the Indian economy. My intention is merely to instigate a desire to comprehend issues that are rooted much deeper than what we read in our daily papers. In other words, I want to raise a few themes that I believe are all inter-related and probably, the root of several problems that the Indian economy faces. 

So for starters, let me remind you of the high inflation numbers that have hurt not just the poor, but also the middle-class – perhaps more than they have hurt the poor. Traditionally, I would have gone about this by researching for CPI & WPI statistics and analyze them from that point onwards. Instead, this time I chose to simply talk to people about where they felt the pinch of inflation the most personally, just to feel the pulse of the problem. Most common areas – as expected – were food, petrol, & housing. Consequentially, their utilities bill has gone up, and savings have been dented. We will look at each of these in greater detail later.  

Now let’s leave inflation & monetary policy transmission alone for a while and look at the fiscal policy facet of our economy. Let’s begin with a special mention of the various populist schemes our government has crafted to win the hearts of the nation’s vote bank. These include the Mahatma Gandhi National Rural Employment Guarantee Act (aka NREGA), and the Minimum Support Price (MSP) given to farmers, & various subsidies on kerosene, diesel and gas, fertilizers, & food items, etc. With elections not too far away, there are more such populist schemes in the pipeline, and not surprisingly, the government has no clue of how the schemes are going to be paid for. The Finance Ministry’s had already used up 70% of the annual target of the fiscal deficit in September, and announced that it needed to borrow Rs. 528 billion. This means that while the fiscal deficit target presented during the annual budget was 4.6% of the GDP, it is more likely to be around 5.5% according to experts. However, our ever-optimistic government still maintains that they can keep it under 5%.

Furthermore, they claim that the additional borrowing has nothing to do with the fact that they have so far failed (anybody surprised?) in their plans to divest their stake in PSUs. The budgeted divestment target was Rs. 400 billion for the fiscal year, raised, primarily by issuing IPOs of the PSUs. However, globally deteriorating market conditions ruined those ambitions forcing the government to postpone their plans, and managed only Rs. 11.45 billion (not even 3% of the target). To add to the woes, slowing economic growth (especially industrial production growth) coupled with a distressing rise in trade deficit (slowing exports due to global slowdown & rising imports due to growth in Indian consumption) is surely going to result in a lower than expected tax collection. And did I mention the depreciating rupee, which has not only hurt the corporate sector (thanks to their dollar borrowings & imported inputs), but also our national kitty (oil, gold, and coal)?

Simply put, these indicators are suggesting that the government has faced a rough year since it has had to deal with lower income (missed divestment targets, declining tax revenues) but higher expenses (weaker rupee and increased subsidy spending) than it had anticipated when proposing the annual budget. Such a bleak economic picture, on both, monetary & fiscal facets, could dishearten even the most optimist policymakers. While the picture is not a pretty one, it has been painted using a brush of newspaper headlines. In my next post, I will mention some reasons why I feel India, despite its issues, is the place to be for the next decade.

Strong words for a place I have only been cynical about so far, but then again, I am a Cynical Bull !