Investors are Idiots Fortnight of 15th January 2013 Issue 39
Expect a pragmatic 2013-14 budget
Arjun Parthasarathy Published: 15th January 2013
Indian Economy
Can we expect a positive Budget for 2013-14?
The events leading up to the Union Budget for 2013-14 to be table in parliament in February 2013 bodes well for a positive budget. The budget for fiscal year 2013-14 is likely to be pragmatic rather than populist, as the government has realized that good economics is better for votes than bad economics.
The government has had it rough in the last two years and it is taking some corrective steps to stem the downside. The first step that the government has taken in the positive direction is recognizing the problems plaguing the economy. Inflation, fiscal deficit and current account deficit (CAD) running at higher levels of 9%, 5.9% of GDP and 4.2% of GDP for fiscal 2011-12 required policy action. RBI tightened monetary policy to bring down inflation expectations while the government cut down on fiscal stimulus to bring down fiscal deficit. Inflation and fiscal deficit are down to levels of 7.18% as of December 2012 and 5.3% of GDP expected for 2012-13.
The CAD is staying uncomfortably high at 4.6% of GDP for the first half of 2012-13 and this is keeping the Indian Rupee (INR) at lower levels of Rs 54 to the USD as of January 2013. The INR is down over 20% against the USD over the last one and half years. The high CAD coupled with the weak INR is forcing the government to take more corrective steps on fiscal deficit. The government is expected to hike Diesel and LPG prices by over 15% to bring it more in tune with crude oil price levels. The hike in railway fares this month (the first major hike since 2004) is seen as a good measure to improve the functioning of the railways.
International rating agencies are pressurizing the government to cut down its deficits and there is a danger of the country losing its Investment Grade Rating if the deficits are not checked. The government at this point of time is keen on taking up its image in the eyes of international investors as it is depending on capital flows to prevent the INR for depreciation on the back of high CAD. Liberalization of debt limits and encouraging flows into equity is expected to bring in capital flows and that flows will be hit if India is downgraded to junk status.
What can be expected in the 2013-14 budget?
Budget 2013-14 is likely to be more pragmatic than populist. Reform element will be low. The government will be keen to show lower fiscal deficit for the next fiscal and a fiscal deficit of less than 5% of GDP will be budgeted. The way the government will achieve a lower fiscal deficit will be through spending cuts and higher taxes. Subsidies as a percentage of GDP will be budgeted at lower than 2% of GDP. There are talks of the government raising taxes for the higher income bracket but that will be seen as anti reformist and hopefully the government will raise more taxes by widening its net.
The government will hope that a recover in the global economy on the back of stabilizing conditions in the Eurozone will push up GDP growth. RBI will also be expected to lower policy rates in the face of a downward trajectory in inflation. Inflation as measured by the WPI (Wholesale Price Index) came in at 7.18% for December 2012 against expectations of 7.3%. Rate cuts by the RBI will help bring down interest rates in the economy leading to an improvement in consumption and investment activity.
The government will not be too ambitious in its GDP growth target for 2013-14 and will likely peg at around 6.7% against expected growth levels of 5.8% for 2012-13.
The markets will welcome a budget that is pragmatic and if global equities stay firm, Indian equities, bonds and the currency can see a strong rally post budget.
World Economy
Japan’s fiscal stimulus and US Fiscal Cliff taking center stage
Japan’s newly elected Prime Minister Shinzo Abe unveiled a USD 116 billion fiscal stimulus program to boost the economy in 2013. Japan’s stimulus is expected to help the economy grow by 2%. Japan has been facing recessionary conditions due to a strong Yen and weak export market. The Yen is up by over 30% against the USD and Euro over the last five years and this is hurting Japanese exporters. The weak economic condition in the Eurozone is also impacting Japan’s economy with exports touching three year lows in November 2012.
Japan’s fiscal stimulus comes in conjunction with a monetary stimulus that is touching USD 1.2 trillion. The Bank of Japan is likely to increase its inflation target from 1% to 2% and is expected to announce fresh additional purchase of bonds. Japan’s fiscal and monetary stimulus has taken down the Yen by 10% over the last couple of months. Japan’s equity index the Nikkei has rallied by 14% over the last two months on the back of a depreciating Yen.
The US averted a potential Fiscal Cliff starting January 2013 by postponing tax hikes and spending cuts that were supposed to kick in beginning 2013. However the US still has to face the debt ceiling issue before it can be free of growth constraints. The country has hit its debt limit of around USD 16.4 trillion and requires to increase the limit by mid February if the government has to pay its bills. There is debate going between policy makers on raising the debt ceiling and the US could suffer a rating downgrade if the government fails to convince rating agencies of its intention to bring down its debt levels.
US economy is expected to come out better over the next couple of years as record low interest rates and bond purchases by the Fed improves housing markets and consumer confidence. The solving of the debt issues by the US can lead to the economy gaining in strength leading to strong equity market rallies.
Follow the Link between currencies, commodities and equities series
Follow the Selecting Stocks for the Future Series
Follow the Ravi series on personal finance
Follow the fixed income investing series
Economic analysis December 2013
Economic analysis November 2012
Economic analysis October 2012
Economic analysis September 2012
Economic analysis February 2012
Economic analysis January 2012
Economic Analysis December 2011
Economic Analysis November 2011
Economic Analysis October 2011