Analysis of Indian Union Budget 2010-11

The Union Budget 2010-11 was another remarkable landmark in the long political history of Finance Minister Pranab Mukherjee. He has maintained many of the union government’s large fiscal policies and has further provided relief to the rising earning middle class of India. Thus, in a broader sense, a totally consumption-based model for growth has been pursued. In other words, the budget allows both rural and urban populace to have more money to spend and continue this remarkable economic boom we have seen in the last decade.

The Finance Minister is looking to close this economically historical decade, by targeting the high growth rates we have been looking to get from the start of the millennium. The target looks "refractionally" even higher thanks to global recession. But, India has done well to decouple itself from the profligate West and its government’s prudent and somewhat conservative outlook has paid off enormously.  

India’s amazing recovery growth story is not just another milestone, but has many signs to read. 

The first is how India has strong domestic consumption and its economy may not be as dependent on exports, as it first appeared. Second, it places India at the centre of the global economic rebalancing along with China, taking in favour of Asia. Third, it sets a precedent of kinds to other political bigheads who are yet write economic policies, to maintain populist fiscal measures.

The annual budget announcement has become a major part of an ordinary citizen’s life today, with due credit to the Indian press, who seem to forget every other news happening for a week or so. But, why not! People’s budget expectations are so necessary in the spirit of the democracy and are what I believe to be the biggest ‘RTI’ of all. Can you think of any other occasion in a year which allows people to make the government to be more accountable to them? Perhaps not, and so I wish to support the further cause by breaking the budget and to even cover issues not usually spoken about in the media as well. So let us begin this, by having a look at the government’s bottom line first.

Taming the Fiscal Deficit

The most important announcement which was eagerly awaited by all was the call to restraint the growing fiscal deficit. The fiscal deficit was being chiefly blamed for the high levels of inflation India has witnessed over the last 6-8 months. However, I am of the opinion that there were many other serious administrative problems which were major aggravators.

So as expected the finance ministry has simply cut, copied and pasted the 13^th Finance Commission’s recommendations and targets. (See the chart for more clarity). The finance minister has committed to bringing down the fiscal deficit 2009-10 level of 6.7 % of GDP to 5.5% of 2010-11 GDP. Also the government has remembered to realign itself with requirement of the Fiscal Responsibility and Budget Management Act of 2003. The government has announced to bring down the deficit to 3% level by the end of next 4 years. 3% target is under the rules of the Act. Although, I think the Act will give more leeway to the FM to dictate his sudden austerity mood swings!

The Union government was well on track to achieve its FRBM targets till the global financial crisis came about. The government had to quickly change gears and announce huge expansive fiscal policies to maintain growth. 

Reforming the Monetary Policy

Monetary policy has become one of the most valuable tools for the administration and development of an economy. Its ability to control the money supply and influence interest rates has a far most influential reach than any other policy. One of the most significant reasons is that the time lag between implementation and result is the least among alternatives. Central bank policy reviews have become one of the most anticipated indicators, for both investors and general public alike.

The policy reviews provide and insight into the overall economic conditions and coming future central bank and government policy changes or tax alterations. The citizens eagerly wait for their newspapers to tell them if home loans are going to get cheaper, if the inflation is going to eat away their savings, is their neighbour going to buy a new car or a scooter, etc. On the other hand, businesses, foreign investors and economists get an analysis of the country’s current scenario and state of economy. Thus, that leads me to the point that how monetary policy has become a part of our daily affairs and that’s why it is so effectual.

Reforming the Media: Influences & Suggestions

Media Corporations are getting bigger and bulkier than before, as they try to capture market share of multiple platforms of radio, print, television, movies and internet. The competition is high, margins are small and their business cycles are dynamic. There is so much stress and competition that today news reporting can be easily influenced in cash or kind. Let us see the various mechanisms of influence

1. Direct ownership: In many of today’s media corporations number of companies or interest groups have stakes in ownership and management. Shifting their focus to shareholders satisfaction and biased news coverage at times.
2. Influence of Advertising companies as clients: To keep their shows and prints running, media companies need advertisements. Thus media companies have to service their relationship with clients and that does imply a favour here and there.
3. Knowledge & data processes: You may have seen on business channels on tv, smartly dressed people with big company banners sharing their thoughts on the markets, which are as volatile as the market itself. Media needs these industry thinkers to lend credibility to their shows, but then it makes the audience credulous to their views.
4. Pre-existing political influence: Media thrives on the news makers and politics is very much intertwined with media coverage. Barack Obama showed us the power of social media in the US Presidential elections last year and I feel all of our Indian politicians are no less then drama queens. It is very well prevalent observation that India’s biggest print newspapers are lenient towards different ideological political parties.

Moreover, large advertisers can influence even competing media outlets by threatening to withdraw their advertising; numerous small advertisers can exert influence if they share a common interest and can coordinate (e.g., when represented by an advertising agency). As a result, media competition alone is not always sufficient to prevent commercial media bias.

A World Oft Forgotten

Within the mainstream news these days, two parallels clearly emerge, the success of developing economies such as India and China, contrasted with the failure of erstwhile capitalist western nations. But sadly the third world remains the ‘third’ world which is still reeling under the bandits of economic growth: high poverty, low literacy, religious fanaticism and administrative inefficiency. It is as if there is no place for this third world on this planet. The everyday East-West comparison in newspapers and journals woefully neglects their presence. Globalization and its benefits are completely absent from the region. They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

As I am writing this blog post, a family somewhere in the far neglected corners of the world is being pushed below the poverty line. To my interpretation, the rise and revaluation of poverty line measures in such regions have been higher than the effective number of people coming out of poverty.

They do have footprints of globalization, but as dumping grounds of the products not suitable for the aforesaid two worlds.

Today the world has changed more than we can grasp in one go. New measures need to be employed to pull up such neglected and backward regions.  First on my mind is the need to shift from macro initiatives to the micro level. Focus should shift to micro-level programmes like micro-lending which have done so well in emerging countries. I feel that measuring and monitoring micro level support plans can be monitored and evaluated more easily and quickly.

Second, would be to eradicate “energy poverty” as coined by Thomas Friedman in Hot, flat and crowded. In simple terms, to enable the masses to fulfil their aspirations by giving them secured supply of electricity. Today, any rural programme even the basic ones from education to vaccination drives require electricity. Overcoming the third world’s inability to connect to the globalised world will be a big step in helping grow confidence.

There are many more measures which are being talked about. But these are the major recommendations which I feel are indispensable. The third world needs to be given more attention. But with tightening budgets of major donors in the West and exploitive bargain hunters of the East, I feel my worst fears for them are going to be true. 

No wonder they pray so much.

Sensex Crosses 20,000: Irrational Exuberance?

BSE Sensex : 32 months ago and today (Source: Google Finance)

The Sensex on Tuesday just barely crossed the 20,000 mark to close at 20001.55 and its fellow benchmark index Nifty closed at 6009.05. There is something very different about the 20,000 mark. It is a limiting psychological barrier, especially since the last time the Sensex crossed it was followed by its worst fall in history (see chart). The stock markets have become a prominent discussion; especially with some people who become over enthusiastic and share anecdotes of their previous heroic encounters of riding the Bull Run. Some are still recovering from the last of the bear claws, and there are most importantly others who are confused and yet obdurate of investing in the markets. For they know if they can pull this one off, it will be remembered by one and all.

The whole dilemma surrounds the principle notion of “this time is different”. But is it really so? Can we be sure that the crash from the peak of 20,000 in 2008, about 32 months ago will not happen again. Can the market pundits on the TV quell our fears about the market, and encourage us to make a quick buck before Diwali? Well nobody can predict the right answers, but we at least have to acknowledge that time is not constant, and whatever the present conditions, this time will never be different.

Source : NSE

The first question, then, is to ask who paid for this ride? FIIs have put in record amounts of money in the stock market this year. The above chart I have assembled shows how currently FII have been strong resilient net buyers and domestic investors are selling their investments. The domestic investors are probably not confident of the market so much and definitely when the Sensex is in the 18,500+ range.