Short-term happy, but long-term? By Sebastien Barbe The Financial Express | March 3, 2005 http://www.financialexpress.com/fe_full_story.php?content_id=84250 Beyond pro-growth and pro-business measures, efforts to control fiscal trajectory appear very weak Finance minister Palaniappan Chidambaram's Budget, presented on Monday, should support India's economic outlook in the short term, and includes some positive points to enhance further the modernisation of the Indian economy. But the modesty of its ambition in fiscal control could hamper the economy's long-term picture. Mr Chidambaram has clearly given more weight to the short term at the expense of the medium term. A series of positive measures should support the rather robust economic momentum and eventually enable GDP growth to reach close to 7% in the 2005-06. Greater availability of funds for the agricultural sector and infrastructure should support growth. In choosing to target only a small decrease in the fiscal deficit, from 4.5% of GDP in 2004-05 to 4.3% of GDP in 2005-06, the government has made its choice clear. There are two other positive measures. Firstly, the decrease in the corporate profits tax from 35-30% is particularly welcome. India's corporate taxes are among the highest in Asia, and they are a significant constraint on the corporate sector. The new rate is still quite high, but the decrease is a promising first step. Secondly, the government wants to spur foreign direct investment, particularly in the mining and pension sectors. In our view, raising the contribution of foreign direct investment to GDP growth is one of the crucial factors that could eventually raise India's growth rate to 8% in the longer term. Since a large amount of national savings is used by the government to service debt and support the economy, increasing investment requires tapping external savings. Foreign investment has indeed picked up in the last two years, but mainly portfolio (and hence volatile) inflows. Direct investment is crucial to ensure financial stability, particularly since, as it is well known, volatile capital can have a destabilising impact in economies with large fiscal deficits, including India. Beyond these pro-growth and pro-business measures, the efforts to control the fiscal trajectory appear very weak, and smaller than what may be expected from Mr Singh's track record as a top reformer. The government counts on economic growth to generate fiscal revenues and limit the fiscal deficit, but has not proposed any direct measure to rein the fiscal slippage. This Budget will do almost nothing to stop the growth in the consolidated government debt � and the task may be more challenging if left for a future day. For this reason, the recent upgrade of India's rating by Standard and Poor's is unlikely to be repeated later this year. However, it is quite clear that the lack of political leeway and the need to satisfy leftist parties are the reasons for the modest efforts for fiscal control. At the same time, the robust momentum of the domestic economy and the resilience of external demand we expect in 2005 should support India's GDP growth and fiscal revenue. Last, but not least, global liquidity remains abundant. This should limit the impact of rising interest rates on debt financing. Another thing to keep in mind is that the 2005-06 Budget leaves the door open to some uncertainties. For instance, the lack of a specific target for asset sales in 2005-06 is not necessarily a bad choice, given that disinvestment targets have often been missed by the past. However, it also means that much is left to the government's ability to convince the leftists in the coalition, who are most reluctant to pursue disinvestment. Concrete proposals to foster foreign direct investment also need to be made clearer, and will depend to some extent on jockeying inside the government between the reformist and the leftist parties. In a nutshell, India's fiscal difficulties would have required a more ambitious and more virtuous budget. However, given the lack of political leeway, this budget is a good compromise between a growth-friendly attitude and the will to get India modernised in the medium term. The author is senior economist, CALYON Corporate and Investment Bank. These are his personal views ------------------------ Yahoo! Groups Sponsor --------------------~--> In low income neighborhoods, 84% do not own computers. At Network for Good, help bridge the Digital Divide! http://us.click.yahoo.com/EA3HyD/3MnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. 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