Unlike the traveller taking the road less taken in Robert Frost?s poem, Budget 2012 has chosen to tread the more familiar fiscal path. A logical way to evaluate the effectiveness of the Budget is against the metrics that it set for itself. An overarching objective of the Budget was to balance fiscal consolidation with strengthening of macroeconomic fundamentals. Credibility and continuity are the hallmarks of this Budget.
The need for fiscal consolidation had become core for encouraging private investment, particularly with signs of public borrowing serving to crowd out private investments. The Budget has brought fiscal consolidation centre stage. It is projecting a 5.1% fiscal deficit for FY13 and 4.5% for FY14. Commitment to check subsidy at 2% of GDP in FY13 is a step in the right direction. Using Aadhaar and routing subsidies through bank channels can help achieve that target easily.
The resulting containment of the government?s market borrowing programme will help boost private sector investment. At the same time, a roadmap of measures to change delivery protocols of subsidies shows a commitment to progressively improving the quality of expenditure. This should reassure ratings agencies and global investors, who were awaiting a signal from the fiscal numbers, as well as indications of strategies for a facilitative investment climate. Given the paucity of domestic funds to finance the magnitude of investments, the Budget will have increased the confidence of foreign investors in India?s growth sustainability, thereby allowing access to cheaper foreign capital, which will also serve to increase domestic liquidity.
There is an effort to increase household savings and to bring retail investors into equity markets. This will increase India?s savings rate, which is one of the key pillars in India long-term growth drivers. Coupled with the improvement in the Centre?s deficit and measures to increase the foreign funds, this should make more funds available for investment.
The bottom line? India?s federal structure necessitates incremental measures. The Budget has underlined the element of continuity in reform steps, with an enabling environment for additional reforms outside the Budget process. This will provide reassurance to investors.
