DARE - Because Entrepreneurs Do

Budget is out, and there are more brickbats than cheers for it for the Finance Minister (FM) Pranab Mukherjee. The market has reacted adversely falling drastically immediately on the day of the budget. Fiscal deficit is at 6.8% of the GDP, with government announcing huge sops for rural sector. There has been no concrete promise on disinvestment, though a paltry sum of Rs1,112 crore is slated to be raised. Industrial sector across the board does not find encouragement for itself in the budget. This has come as a bitter pill in the aftermath of the Economic Survey, laid out before Parliament just a couple of days ahead of the budget, asking to raise Rs25,000-30,000 crore from disinvestment.

But is the budget the conclusive statement by the government as far as the policy is concerned. No, it is not. Budget is an important policy or intention announcing document of the government, but it has not remained as sacrosanct as before.

As FM said there was a clear mandate to give more push to the rural development policies. The changes in rural areas are there for everyone to see. NREGA has made definite impacts in rural areas. FM is, after all, not supposed to do what pleases the market all the time. There is no harm in focusing on creating a sustainable growth in rural areas. To expect a 4% growth is agriculture is appreciable, and if this is achieved, it will give a tremendous boost to all other sectors, including the Indian industries.

FM has also rightly focused on infrastructure. The government expenditure has gone in excess of Rs10 lakh crore, and the provisions of Fiscal Responsibility Act has gone for a toss.

Fiscal deficit at a high of 6.8% indicate a possible return of monetization policy. When coupled with the 4% fiscal deficit of the states, this assumes a scary proportion. This makes it a cut and dried case for a distinct increase in interest rates and inflation. This in itself will be a paradox, as India will prove to the only country in the world to have high interest rates at this juncture - at a time when LIBOR is in the vicinity of 0%.

But the FM is a learned person, and he is well aware of the expectations of the various sectors, and the high fiscal deficit. FM has given indication that FDI will be increased. It will be no surprise if the FDI limits in several sectors are liberalized further. Minus the communists this will prove easier for the UPA -II government. In such a situation, it will also be no surprise if the amount raised through disinvestment is actually used for improving infrastructure. This will help keep interest rates and inflation under some check.

The FM has, in all probability, shown only the tail of the tiger by announcing a small target from disinvestment. The FM has also hinted at it in the post-budget interviews. Some big PSUs would witness disinvestment for sure in the year, and amount raised would be many times more than the target.

The market may show disapproval in the immediate scenario, but affects of huge expenditure on rural sector would start reflecting in the second half of the year. This will have a positive bearing on the share markets as well in the long term.

One should not forget the government is in place for five years, and not just for this year. Fiscal deficit may be allowed to inflate it a bit this year, but it may not be the same next year. FM has given an indication that deficit would be brought down to 5% and subsequently to 4% by 2011-12. And, one thing is sure, a little inflation for higher growth rate is not an unusual event in India.

One must wait and see the announcements by the FM later in the year. It is pretty sure major policy decisions are going to be announced. We should not discount the fact that announcing major decisions outside budget have become a common practice now.