Friday, August 10, 2012

FISCAL CONSOLIDATION

...GOVERNMENT BORROWING WOULD DO THE TRICK

At this point in time the expectations from the budget are muted. We believe that given the high fiscal deficit of last year, this will be a budget that targets fiscal consolidation and hence we believe that a degree of stimulus withdrawal is inevitable and also desirable. We believe that achieving the fiscal deficit number of around 5.5% of GDP should not be a challenge and given the economic indicators the government can reduce the gross borrowing figure significantly through lower spend on various subsidies.

This would be a measure that would take the form of retail fuel price increase and can be outside the budget. Similarly a drop in food and fertilizer subsidy would be the most market friendly way of reducing the fiscal deficit and would benefit the broad market besides the sector itself.The other market friendly way of bridging the deficit is to raise money by selling 3G licenses and stakes in government owned companies. While, the fate of disinvestments depends on the state of the markets, we believe that the government has assets which will have good demand. While the cut in subsidy bill is clearly a desirable outcome, it may not be accomplished in one go. We believe that in times like these when it is difficult for Corporates to borrow money from outside, a $10-15 billion of government borrowing in the overseas market would do the trick. It would leave domestic liquidity for corporate growth and provide cheaper finance to the government. The risk on exchange rates would be low because India is slated to become a current account surplus country once again over the next year. We believe that such a move would also be taken positively by the market.

Markets are unlikely to react positively if there is an attempt to increase revenue base by increasing taxation besides in the manner of rollback of stimulus granted in response to the slowdown.


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