Tags: india | budget | spending

India Embraces Fiscal Discipline That US Has Avoided

By    |   Wednesday, 21 March 2012 09:06 AM

I recently mentioned the elections in India. The ruling Congress party had taken a significant hit. The party is losing its grip on the nation and was beginning to panic.

At that point, it was a toss-up whether they would throw fiscal discipline to the wind and hand out wildly popular sops to the average person with an eye toward the national election in 2014 and winning the people’s vote. Or they could have taken the hard road and forged ahead with their reform agenda, hoping that the results of that in the next two years would swing the vote back in their favor.

Life threw out what it does best – a curve ball. A third option.

India's fiscal-year 2012 budget has turned out to be rather boring and non-spectacular. There is a little bit for everyone and not enough for anyone to call it a victory. The average person has received higher tax exemptions on their base income before they pay taxes. It is a classic move that always grabs the headlines. When you peel the onion, you notice that it is tilted towards the rich a tad bit. Yet the benefits are very small, relative to the average person who is struggling with a 9 percent to 10 percent inflation rate. Their savings due to lower taxes will vanish rather quickly.

The industry (India Inc.) is also unhappy about the lack of incentives and growth it expected. After a tough year and huge fluctuation in the exchange rates and high inflation battles, they needed a soft soothing budget full of growth initiatives. Well, they got none of that.

It was a fair budget with some increases in taxes and power costs. There are benefits to certain sectors such as power generation and infrastructure companies, which can generate funds at cheaper rates. Low-cost housing sector companies also received a strong shot in the arm.

The real winner of this budget is fiscal discipline. We have seen the Indian rupee fall in the past year due to the fact that deficit spending is higher than forecast. Some of it can be blamed on the high cost of oil imports. But in general, there has been waste by the government. (Not a real shocker now, is it?)

The government decided to tackle the deficit spending and bring it down to 5.1 percent of GDP from the current year run rate at nearly 8 percent. If that plan holds, the deficit will shrink. While it will not put India back in black, it will certainly arrest the bleeding, something the United States has still to learn how to do.

With the deficit spending still relatively high, the opportunity for the Reserve Bank of India (RBI) to cut interest rates and help industry will be severely curtailed.

In addition, many of the policy changes are inflationary, which will continue to stay relatively high. Last month, inflation numbers nearly hit double digits again.

The Indian budget was a mixed bag, with certain companies which will be winners and some that will have a very tough year. We will invest in the right sector with fundamental analysis and reap double digit gains.

With the Indian stock market open to foreign investors, we can make some wise choices and position ourselves for handsome gains.

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Wednesday, 21 March 2012 09:06 AM
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