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Wednesday, 24 February 2016


Budget exercise by the largest democracy of the world deserves attention especially in the backdrop of global volatility, falling crude prices and erratic FII behavior. Media hype for the budget is justified in the present conditions especially after the third quarterly results of our PSU banks. In the last budget, fiscal consolidation was the major agenda with the specific laid out path till 2019. So, both domestic & global analysts along with dreaded international rating agencies are ready with their magnifying glasses to react before reading the fine print. Fiscal consolidation though need of the hour cannot be the sole driving force for annual budget of a country like India with a passive private sector and an entangled banking sector. As for the international rating agencies, they had downgraded USA in 2011 which is still the supreme growth engine of the world.

Coming back to our own fiscal deficit issues, higher fiscal deficit definitely leads to higher government borrowings spiking interest rates augmenting inflation. So this vicious circle has to be curtailed through fiscal discipline. But is it possible with latest seventh pay commission recommendations to be implemented along with higher capital requirements of public sector banks. In addition to that, the expected capital expenditure plans and various social schemes to be laid out for the coming fiscal would be a catch 22 situation for Mr. Jaitely. If he walks on the path of fiscal consolidation, it would be difficult to revive investment cycle so urgently required to pull India out of this morass of slow growth and get back to 9-10%. On the other hand, higher deficit will lead to higher government borrowings increasing cost of capital further hindering private sector participation.  

Whatever might be the case, we should not formulate our future growth with respect to whims and fancies of foreign portfolio flows or international rating agencies. China has already set an example that sustainable growth can be achieved only though strong economic model based on domestic consumption. We already have this model intact with strong macro fundamentals and pursuing this has helped us to weather global volatility. But right now we have to take a call between rapid debt fueled growth or long term sustainable growth through structural reforms.    

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