New Delhi: The newly re-elected government may have disappointed investors with a deficit-laden budget lacking big pro-market initiatives but it does not mean the government has abandoned intentions towards reforms.
Investors, many of whom had priced in unrealistic expectations from Monday’s budget, need patience.
Government insiders and observers said more is to come.
“The thing this budget may be remembered by is ‘delay´. A delay to deficit reduction, a delay to subsidy cuts and flexible fuel pricing,” UBS economist Philip Wyatt wrote in a note.
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Budget 2009 (Complete Coverage)
Monday’s budget release was heavy on spending for farmers and the poor, a core constituency of the Congress party-led ruling coalition, funded by a surge in borrowing and an increase in the fiscal deficit to 6.8% of GDP.
Investors who wanted restrictions loosened on foreign ownership, tighter fiscal management and an end to costly fuel subsidies were disappointed.
Finance minister Pranab Mukherjee made few promises with his budget, Morgan Stanley economist Chetan Ahya wrote.
“Indeed, we believe he was careful to avoid making noise on politically sensitive issues such as divestments and FDI (foreign direct investment),” Ahya wrote.
“However, we believe ‘no mention’ in the budget does not mean ‘no action’ on this front,” he wrote, adding that it is highly likely that the government will raise $5 billion from divestments in the fiscal year that ends in Match 2010.
But fears that Prime Minister Manmohan Singh’s government has squandered the opportunity to use its sweeping re-election mandate to usher in a wave of reforms are premature.
Finance minister Pranab Mukherjee speaks during a post-Budget interaction with industrialists in New Delhi on Tuesday. Manish Swarup / AP Photo
Instead, Monday’s budget was aimed at broadening economic growth and opportunity -- funding for rural infrastructure ultimately generates new demand. Indeed, the rural sector has helped insulate India during the global economic downturn.
Spending on rural areas and the poor also benefits a constituencies -- farmers and the poor -- that were key to Congress’ big win in May and will also be crucial in upcoming state elections.
“Political reality has been taken care of by this thanksgiving budget,” said DH Pai Panandikar, president of private economic think tank RPG Foundation.
“But I think reform issues will be taken up in the next budget. Reform measures have become an agenda for the future.
While much stock is placed in India’s annual budget announcement -- far too much, critics say -- key policies are increasingly made outside the budget process.
Saumitra Chaudhuri, a member of the Planning Commission, said Monday’s budget speech is not the last word on the government’s plans.
The contentious issue of subsidies on gasoline and diesel, which are hugely expensive but politically popular, was shifted by Mukherjee to a committee for investigation. Last week, the government unexpectedly raised prices at the pump by as much as 10%.
“I think there will be many other adjustments that need to be made. Petroleum product pricing -- he has essentially exported the problem out of the budget into a committee,” Chaudhuri said.
Chaudhuri also said more details were likely in coming months on the planned sale of government stakes in state companies.
And while the budget did not include the removal of foreign investment caps in key sectors, transport minister Kamal Nath told Reuters on Tuesday that the government aims to attract a massive $10 billion a year in overseas funding for road-building.
Investors who treated the budget rudely on Monday -- stocks made their biggest drop in six months, bond yields rose and the rupee sank -- took a more sober view on Tuesday, with both stocks and the currency clocking gains.
“Clearly, this is a budget from a government that has five years in which to build a strong economy,” wrote Madhabi Puri Buch, managing director and chief executive of ICICI Securities.