Analysis of the Indian budget – Speculating on the fiscal discipline

Keeping the increasingly complex political landscape in mind, the Finance Minister, Mr Pranab Mukherjee has presented a compromise budget (in which the specifics of fiscal discipline were not dealt with) with the intent to get it passed in the Parliament. The intent to keep subsidies capped to less than 2% of GDP is encouraging and implies that policy measures to be introduced in due course would help reign in the subsidy escalation.

While the subsidy cap is a step in the right direction, it seems a bit unrealistic given the firm oil prices and the embargo on Iran which threatens us with run away oil prices. In which case the fiscal discipline would be out of control leading to higher market borrowings. A case in point is the budgetary allocation of Rs 53,640 crore to petroleum subsidy of FY12 which was way behind the actual subsidy of Rs 68,481 crore and that too when the average oil prices were much lower than the current Brent crude price of $125 per barrel.

Already the governments borrowing at Rs 4,79,000 for FY13 is higher than that of last year. This is an uncomfortably large number and will ensure that the interest rates will remain elevated, at least in the immediate future. Further if strict fiscal discipline is not adhered to then we risk the danger of higher borrowings leading to fuelling of inflation and crowding out the private sector from the credit markets hampering growth and make the projection of GDP growth of 7.35 – 7.85 look ambitious.

Please download the file for Analysis of the Indian budget 2012 -2013. Speculating on the fiscal discipline

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One response to “Analysis of the Indian budget – Speculating on the fiscal discipline

  1. Pingback: The energy complex is just about to go berserk | Low risk trading strategies for the Indian markets

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