We expect too much from the budget. This year, those expectations were shaken somewhat, and when trading closed on Feb 28, hours after the finance minister’s speech, the equity markets were at their lowest for the year. I wouldn’t fault the FM for this; given the circumstances, I think he’s made a game showing. The situation he has inherited is horrible; his budget forced markets to take a closer look at reality.
The core reality is a slowing economy, which even the government’s own Central Statistical Organisation estimates will grow only 5.0 per cent during the financial year 2013-14. The UPA government had gotten used to an economy—and tax revenues—growing at a much more rapid rate, and become increasingly profligate with its expenditure on welfare schemes. At the same time, it had refused to adapt to stubbornly high crude oil prices, allowing subsidies on both petroleum and fertiliser to mushroom. The mix of slow revenue growth and ballooning spending led to record deficits and greater dependence on borrowing from abroad.
These twin deficits made us extremely vulnerable to the views of markets and the rating agencies that pronounce on them. To stave off further downgrading, Chidambaram had to instil faith in his ability to control our deficit. He pledged to hold the deficit to 5.3 per cent for the current year, and bring it down further the next. His budget pegged this number at 4.8 per cent for the coming year. His targets hang on optimistic estimates of the economy growing by over 6 per cent over the year (6.1-6.7 per cent, the Economic Survey suggests). Even if revenues do pan out as the FM projects, he would need to borrow more money via bonds. His forecast left the bond markets a little uneasy; they closed with the cost of borrowing (the yield) on 10-year bonds up by about 0.06 per cent, or 6 bps.
This won’t bust the bank. Nor will the day’s drop in the rupee, by one per cent against the dollar. But drooping equity markets, weaker bonds and more expensive foreign currency all signal concern about our economy and about macro-economic developments over the next year. Down 1.8 per cent on Budget Day, the Nifty headlined this worry. Down the pecking order, the losses were deeper, with the Nifty mid-cap index down by over four per cent for the session. As many as 11 of these 50 mid-cap stocks lost over five per cent each. Banking stocks and infrastructure firms were hit on the chin, with the bse sub-index for power stocks down four per cent.
Two major concerns going forward—global economic recovery is still shaky. This may lead to volatility in the financial flows that support us. Also, our equity markets are still somewhat richly priced for an economy growing at 5 per cent. If slower flows meet sharply lower growth expectations, our markets could take a massive hit.
The writer is an entrepreneur, investor, and economy-watcher; mohit.satyanand AT gmail.com