Gradual rollback of stimulus seen in 2010-11

Gradual rollback of stimulus seen in 2010-11
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First Published: Wed, Feb 17 2010. 01 34 PM IST
Updated: Wed, Feb 17 2010. 01 34 PM IST
Mumbai: India will gradually wind down its growth-supporting stimulus over the next fiscal year beginning on 1 April, but will still need to borrow a record amount from the market, a Reuters survey of economists showed.
The government will present the Union budget for the fiscal year 2010-11 on 26 February, with markets waiting for details on the stimulus, borrowing, and fiscal deficit as well as a roadmap for introducing a new goods and services tax (GST).
Twenty six out of 28 economists polled see the rollback to be either gradual or expect the government to take marginal measures to withdraw the fiscal stimulus introduced in October 2008 to help Asia’s third-biggest economy cope with the global financial crisis.
The survey of 27 participating economists showed a median fiscal deficit of 5.6% of gross domestic product in the 2010-11 year. Gross market borrowing of the government is forecast to rise to a record Rs4.61 trillion ($100 billion) in the next fiscal year from this year’s 4.51 trillion.
The government is expected to raise Rs27,500 crore ($6 billion) through selling its equity stakes in state-run companies, the survey showed.
The survey also showed that half of analysts expect little change in the government’s social spending on sectors such as education, healthcare and rural development.
Thirteen out of 27 economists expect the budget to announce measures to allow more foreign investment in local companies and 14 expect significant steps to raise agricultural productivity.
Factors to watch
• The government is likely to announce a timeframe for introducing the GST. Last month, Union finance minister Pranab Mukherjee said it would take 7-8 months to prepare laws to launch the tax, which would replace a multitude of levies such as excise duty, service tax, value-added tax.
• The Congress government coalition enjoys a majority in the lower house of Parliament and will be more comfortable about selling stakes in state-run firms than in its last term, when it was backed by Communist allies, who were opposed to such reforms.
• The government will probably announce measures to step up fiscal consolidation in the budget and trim deficit levels. It projects a fiscal deficit of 6.8% of GDP for 2009-10, but wants to lower it to 5.5% in the next year.
Market impact: The bond market will focus on the government’s borrowing target for the 2010-11 fiscal year. A significant increase from this year’s record Rs4.51 trillion would lift government bond yields and overnight swap rates.
Measures to allow more foreign investment in local firms would support the partially convertible rupee and stock markets.
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First Published: Wed, Feb 17 2010. 01 34 PM IST