The announcement of growth
figures for 2009-10 at 7.2 percent where all sectors are expected to
be growing at above 8 percent (barring agriculture at -0.2 percent
and construction at 6.5 percent), reveal that the Indian economy has
held up remarkably well in face of a severe deficiency of rainfall
and the international economic and financial meltdown. These figures
augur very well for future growth which, as we have maintained
elsewhere will enter the 9-10 percent long term trend in the next
Already macro figures indicate
that investment levels have not been affected too much over the last
two years, and we believe will continue to be healthy in coming
quarters and years. Moreover, after a long gap investment in
agriculture related infrastructure will start to show an increase ?
though a large part of it will be coming from private entities and
may not show up in the budget figures.
Currently all eyes however are on
the budget for 2010-11 - to be unveiled this month as the government
will put forth its plan to wean the economy off the stimulus granted
during the global crisis. We expect the government to increase the
excise levels somewhat but not totally to the pre-stimulus-package
levels, minor increases in social sector expenditure spending, and a
minor movement in arresting the petro price related deficit. Beyond
this, there is little the FM will do.
This stimulus has come at a large
cost, as we had been warning in our newsletters earlier. In our May
2009 newsletter we had written about the upcoming dangers, that are
clear to all now: ? The main problem however will come up later this
year, or may even surface next year when the high fiscal deficit
will combine with rising demand to raise inflation levels
substantially. Even now, the WPI which had been forecast by many to
hit negative numbers, is still reluctant to oblige; even with the
high base effect, large positive week on week rises have kept the
WPI inflation in the positive zone. ?Worldwide, as prices reflect
the expectations of demand, we can expect higher levels in basic
commodities like crude, copper, steel etc. as news of recovery in
emerging economies impacts these markets. Again, we caution that
this does not mean a hike into levels above $100 a barrel for crude,
for instance, but the range of $40-50 of the past 3 months will move
to higher levels of $60-70, consumers, the government and the firms
must be prepared for this.? Over and above this, the news from
Europe is not good and will impact international financial markets
adversely ? this will occur over the next few weeks if not months
and India needs to be prepared for it.
Meanwhile, the RBI has also
effectively announced that it will not take a hawkish stance on
interest rates or liquidity and expects the government to announce
some withdrawal of the stimulus package and reduce deficit levels.
We expect that that would be in the 5 to 5.5 percent range for
2010-11 budget. But we continue to maintain, this will not be good
enough, and the FM should try harder at curtailing the deficit.
Inflation levels for March end
have been estimated by the RBI at 8.5% against the 6% earlier, even
as the CPI inflation has been afire the last few months. While part
of this is due to the rise in food prices, prices of crucial inputs
like steel have been on the rise the last three months as well. As
crude has moved in the range we had forecast, there is talk again of
the need to free petrol and LPG prices, talk of under-recoveries in
OMCs to the tune of Rs. 43,000 crores this year. How long will the
govt. continue to push real issues under the carpet?
It?s all very well to laud
ourselves on an economy that has ?recovered? but growth that is
fuelled by fiscal profligacy is hardly an achievement. So this year,
surprise us, Mr. Finance Minister. Get a move on the real reforms,
shake the economy up and let?s see the forces that will let loose
real, inclusive, sustainable growth.