One big boost up for the finance minister and the Indian economy is the stable government at the centre. A strong mandate for the strong government pushed the market up and pulled all the vanished FIIs. The FM should build on this positive momentum and maintain in every corner in control. More importantly infrastructure, agriculture, rural development, youth and disadvantaged sections should be given extra attention. This budget should address all these with renewed vigour and total committment.
M.K. Venu writes in The Economic Times (16 June 2009)
Pranab Mukherjee may also turn out to be a lucky finance minister, much like his predecessor P Chidambaram who presided over an average GDP growth
of over 8.5% during his tenure. When Pranab took the reins of finance ministry towards the end of the last UPA tenure, the global economy seemed to be falling off a cliff. His interim budget numbers had gloom written all over.
Now, as he prepares to present his full budget next month there is a lot of optimism on the horizon. Mind you, this change has occurred in just the last six to eight weeks. For starters, everyone, including the RBI, appears inclined to revise upwards the GDP projection for 2009-10. This should be music to Pranab’s ears as all budget numbers are predicated on the expected GDP.
The most significant thing to have happened in the past month is a sure sign that global capital is unfreezing as some confidence is back in the western financial system. India had over $5 billion of portfolio investment pouring into the stock markets since late April. The big new development is that India is now getting a larger share of portfolio capital flowing into emerging market economies.
In 2009 alone India has received about $5.5 billion of FII money out of a total of $23 billion that has flowed into emerging markets. So India received close to 25% of the portfolio funds coming into markets in Asia, Africa and Latin America. Until 2007, India would receive less than 15% of the funds flowing into these markets.
The discernible change is investors see India as safer than many other export-led Asian economies that are still suffering a negative GDP growth due to their excessive dependence on OECD economies. So going forward, India is bound to get a bigger share of both equity and debt from the global financial system, irrespective of what the likes of Standard & Poors’ and Moody’s might have to say.
In fact, these rating agencies too have begun to look at India in a different light over the past few weeks. Now, fiscal deficit is not such a concern as prospects of reforms have improved. This is a sort of post facto rationalisation of events. India’s economy is far too complex for anyone, rating agencies included, to fathom. The fact is India has a schizophrenic parallel economy, estimated to be about 40% of the official one, which acts as a cushion against any economic crises.
For instance, there can’t be large scale housing payment defaults in India simply because most home buyers pay a tidy sum as unaccounted cash. They can’t just simply walk away from the loan. Similarly, as per NCAER data the bottom 80% of India’s population accounts for 65% of the total consumption. The bulk of these are in rural India with possibly no bank accounts.
In a perverse way, this acts as a partial cushion against a global recession. Similarly, some economists also argue that actual fiscal deficit as a ratio of GDP should be much lower if the unofficial GDP is added to the official one. The rating agencies would do well to spend some of their resources in researching the black as well as grey parts of our vast economy! They will then understand why India’s economy does not get into a major Latin America-type crisis in spite of consistently running a government borrowing programme of close to 10% of GDP (Centre and states together).
Let us see whether Pranab Mukherjhee will perform a modern FM role or the old symbolic socialist sloganmongering minister
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