New Delhi: Despite initial investor disappointment, Indian business leaders on Tuesday praised the government’s new budget as spurring growth by spending money on developing roads and other infrastructure, especially in poor rural areas.
The Budget, presented on Monday by finance minister Pranab Mukherjee, will boost total spending by 36% to Rs10.3 trillion ($214 billion) between now and March 2010.
The budget “provides a critical stimulus for sustainable economic growth,” said Sajjan Jindal, president of the Associated Chambers of Commerce and Industry of India, a premier trade body.
“By increasing the disposable income in the hands of the common man and creating more employment in the rural areas, the consumer spending shall revive the ailing economy,” he said at a meeting between Mukherjee and India’s top industrialists and business executives to discuss the budget.
Industrialists at the meeting congratulated Mukherjee for the growth-oriented budget.
They welcomed pledges to remove bottlenecks in investments and places emphasis on private investment as engine of growth, including cold storages, food processing plants and roads in rural areas.
The positive reaction was in sharp contrast to Monday, when investors dumped stocks, spooked by the high fiscal deficit and a lack of government commitment to sell off public sector companies. It was expected that sales worth Rs250 billion ($5.21 billion) would be announced by Mukherjee. However, he unveiled a sale of only Rs12 billion ($250 billion).
Mumbai’s benchmark stock index, which had tumbled nearly 6% a day earlier, rebounded about 1% on Tuesday.
The financial plan fulfills two goals. It delivers on the ruling Congress Party’s electoral promises to improve living standards in rural India where a majority of its 1.2 billion people live. It also increases spending to ensure that India remains one of the few major economies to avoid falling into a recession amid the global financial meltdown.
“Yes, I had to fulfill my commitment which we made to our electorate,” Mukhurjee said. “We have to be accountable .. to every stakeholder. And they (the rural population) are bigger stakeholders.”
The high spending will leave a fiscal deficit that will amount to 6.8% of the gross domestic product, up from 6.2% last year. Half of the money will be borrowed from the market while the rest will be new printed notes.
Mukherjee said the government is aiming to reduce the fiscal deficit to 5.5% in the next financial year starting in April 2010, and to 4% in the following year.
“No doubt I have taken a risk” by allowing such a big fiscal deficit, but there was no choice if India has to continue on the path of growth, he said.
“The one basic approach with which I worked was that we must come back to the growth path as soon as possible,” he said. “We cannot wait any further. We cannot afford to waste any time. Therefore it was considered that we can take that risk.”
India’s economic growth slowed to 6.7% in the year through March 2009 after an average of 8.8% in the previous five years.
Analysts didn’t seem unduly bothered by the fiscal deficit.
Goldman Sachs said in a report that “in general, we commend the fiscal proposals to boost the economy, and think a short-term increase in the deficit is warranted.”
Mukherjee said investors were looking at the wrong place for details of disinvestment, indicating that more announcements would follow on public sector sell-off.
“The budget is not the document which can set forth the micro details for disinvestment,” he said. “A single budget cannot offer solutions to all our problems.”