Fairval

Notes on Indian equities, sectors and economy

A clueless FM, a callous UPA-2

Posted by fairval on March 17, 2012

The budget once again shows how much of a tight corner the UPA-2 government has got India into. The net result is – India Inc is up shit creek, with no paddle. Very soon, the consumer may run out of steam as well.

Since a lot has been written by analysts and media already, this post sticks to some key numbers. Check the table below. See row 7 – the government’s market borrowing. Between fisc’07 to fisc’12, borrowing has grown at a humungous 30% p.a. One can understand one year, fisc’09, when there was a global slowdown, so maybe some excuse to hike expenditure, and borrow more. But the way this has continued even after is hugely unnacceptable. In ’09, the borrowing has gone up 2.3x. But even after that, borrowings have grown at 15% per annum. Even in fisc’12, they have grown 35%. In other words, what the UPA-2 government has done is daylight murder of the private sector.

I have written earlier that the FM screwed up bigtime by hiking spends so much in ’09, and not toning down in ’10, or even ’11. The result – high inflation and high interest rates.

I am afraid neither is going to come down soon – not inflation, nor interest rates.And the sad reality is – there was very little elbow room for the FM/UPA-2. Having screwed up thrice earlier, they had no bullets left now.

The tax hikes were necessary to boost revenues, since in FY12, revenue receipts were actually down 3%. This will spur inflation. Even with tax hikes, planned borrowings are very high, and they will exceed the budgted number for various reasons – the telecom revenues will not come, subsidies will go up has oil will remain strong. Also, what is revenue recepits are below budget, like in FY12? So private sector is screwed, there is very little scope for meaningful reduction in interest rates.

Also, note how capital spends always get sacrificed when there is no elbow room left. See line 18. Capital spends, which were anyway not budgeted to grow much in FY12, actually fell over FY11. Now while the FM has bravely projected growth in FY13, likely the actual number will be low if the government finds revenues below budget.

The RBI let the rupuee go to above 50 to cool inflation somewhat (and to curb current account deficit). Most likely, rupee will resume its downward trend now. Current account is another uncomfortable number. Dont see any escape from several pincers on the economy this year – inflation, interest rates, CAD, rupee..Some possible positive moves – hike FDI levels in insurance, airlines, open retail etc will not happen with Mamata types around and 2014 elections looming. Serious divestment cannot happen either for same reasons.

The other potential turnaround factor, some big ticket FDI, will not happen either. Red tapism is keeping FDI low as well. LN Mittal and Posco etc are still struggling to get an entry.. This is beginning to feel like 2001..Hope some private sector biggie sells out. Like say RIL sells out to Exxon, or Dabur to P&G, or Wipro to IBM. Maybe that will catalyse something..

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