Monday, July 6, 2009

The budget and the market

Finance ministers delivering budget speeches are normally constrained by having to earn more or less what they dole out. So, when Pranab Mukherjee began listing dozens of programmes which were going to receive funding boosts of between 50 and 200%, I was thinking tax, tax, tax must follow spend, spend, spend. But that's not the way the world's working at the moment. We've already seen the Obama splurge, and now India's got its own stimulus special. The idea is that government handouts will boost demand which will boost growth which will boost revenues down the line. If India returns to a 9% GDP growth rate, it should be able to bring the deficit down to a reasonable level, but that's a big If. Meanwhile, Mukherjee must have enjoyed the chance to throw around the freebies.
The market, meanwhile, behaved like a guy determined to score on a first date, and unwilling to settle for anything short of the big bang his friend Mr. Media had hinted was coming his way. Unable to make it to the bedroom, he goes home convinced the episode was a disaster. Reflecting on the evening later, he thinks, "well, she obviously is into long-term stuff rather than one-night stands (reform is a process, not an event), the dinner was fun, if a bit pricey; the goodbye kiss wasn't bad (FBT scrapped, 10% surcharge on income tax out); and she seemed serious when she told me to call her".
Maybe the market will make that call a few days down the line, and it could be the start of a wonderful relationship.


alwaysindian said...

The union budget dissapointed the markets. The budget has not thrown up anything new, but simultaneously has not created major hiccups in the path to progress.

Satish said...

nice, succinct, summary... though the imagery of someone scoring with pranob-babu is hard to shake-off!

jaimit said...

Oh yes, the times are for spending I guess. If you had noticed the FM nearly thumped his chest and proudly declared to a round of applause that the government of India will for the first time cross spending of some large number (I think it was 1 lakh crores). Wow. Screw money supply, inflation, fiscal prudence, surpluses. How would you react if some company announced their results and said this year for the first time in our existence we have spent 500 crores in one year and all the shareholders applauded? The last I saw this, was in a movie called Brewster’s Millions, remade as Maalamaal with Naseer.

Girish Shahane said...

Thanks, Satish, I agree the image of Mr Mukherjee replacing the pretty date is gruesome, had to suppress it myself.
Jaimit, what worries me is not just the huge spending increases, but where they went. Will it be possible to bring the NREGA budget down to more realistic levels in the future? As for defence spending going up by over 30% on a huge base, I wonder how much of that qualifies as stimulus. If they're going to spend the money to troops, it's likely to become a recurrent expenditure (as will those pension increases he announced); if, on the other hand, it will go largely to equipment purchases, it won't help the Indian economy much given our dependence on foreign supplies.
Having said that, the private sector has hardly been the soul of prudence these past few years; they're the chaps who got us into such a deep mess in the first place.