The Indian economy is doing well on the back of 7%-8% year-on-year GDP growth and foreign inflows, both portfolio and strategic. Stock markets are booming and it has become a tightrope act to ensure policy announcements don't cause that to change.
Yet, the strong economic performance has brought with it its own set of problems. Inflation has become a large concern in the country as demand out-strips supply. The finance minister had to ensure his budget in no way stymied growth. And the biggest challenge facing the worldÆs largest democracy is how to ensure the benefits of the economic growth percolate to the grassroots. Disparities of income are on the increase and it is universally felt that it is an imperative for the country to develop and pursue a more inclusive growth strategy.
Atanu Dey, chief economist of Netcore Solutions who also authors a blog, says: ôThe government has been implementing pro-poor policies since independence. And the policies have been unconditionally successful. They were pro-poor and they have succeeded in increasing the number of poor, literally. If they had been pro-industrialisation policies, they would have succeeded in industrialisation of the country. But being pro-poor policies, they have increased the number of the poor, and consequently poverty in the country.ö
Further, as the economy has continued on the path of liberalisation, budgets have lost some of their significance, a point many analysts made in the run up to February 28. Analysts commented that with the opening up of the country, it is now far more affected by global cues than country-specific announcements.
Against this backdrop, Chidambaram announced a budget which sought to balance various competing objectives. He reduced duties on petrol and diesel and in general tried to hold steady or reduce duties on various inputs to control inflation.
Sanjay Kapoor, partner in retail business Genesis Colors, says: "The budget is pretty friendly for small-scale industries and generally moving in the right direction. The customs duty cut is welcome."
The budget laid emphasis on investing in agriculture, which has not shown the same rate of growth as the countryÆs industrial or service sector. Chidambaram also singled out education and infrastructure creation for further investment though not enough to silence his critics.
Mathew Jacob, founder of India-based boutique financial advisory firm MAPE Advisory, comments: ôAgainst a stated objective of "faster and more inclusive growth", the finance minister seems to have targeted more on the "inclusiveness" aspect than on faster growth. While more investments in the field of health and education are welcome, some concrete measures on fostering faster growth are missing. Also not enough emphasis has been placed on investing in infrastructure, a crying need of the economy.ö
Chidambaram was restrained in tax rate increases leading Ananda Mukerji, managing director and CEO of Firstsource, a leading Indian business process outsourcing company, to say: ôIt is encouraging that in general the tax rates have been left unchanged particularly corporate income tax and service tax.ö
But stock market investors were disappointed with a proposal that dividend distribution tax be raised from 12.5% to 15% on dividends distributed by companies and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors. MAPEÆs Jacob says ôthis is a retrograde step: it is going back on the premise that dividends are not taxableö.
Even before the new dividend tax announcements, Indian stock markets have been decidedly bearish over the last few days. India's markets have witnessed a sustained bull run since 2005, in tandem with many Asian markets, though IndiaÆs have increased higher and faster leading to over-heating concerns. The Sensex crossed 10,000 just a year ago and despite a few minor corrections has continued to rise, breaching 14,000 earlier this year.
Pre-budget uncertainty, nervousness on account of inflationary pressures and an interest rate hike had led to some weakness in the stock markets over the last fortnight; this was exacerbated considerably on February 27. That day IndiaÆs stock markets, following world market cues, lost 170 points. Compared to neighbour China which saw a 9% drop in one day - its biggest percentage fall in almost a decade - the 1.25% the index lost may not have been a huge drop. Nonetheless, it was significant enough for many people to wonder whether the long-awaited correction in the Indian stock market had finally commenced. Markets continued to fall on February 28 with the Sensex losing 4.5%, its biggest fall since May, 2006. It closed below the 13,000 mark.
It is unfair to blame Chidambaram and his budget for the meltdown in the Indian stock markets - although given the timing many will perhaps draw this erroneous conclusion. The views of Vallabh Bhanshali, chairman of Enam Financial Consultants, sum up reaction to the budget well: ôThe finance minister has held his ground and not yielded by bringing in populist measures. The countryÆs fiscal position has consolidated and we can look forward to controlled fiscal deficits at the centre and the state. The markets and the economy do not need much more and we should learn to move ahead as the big boys that we are.ö
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