In­dian bud­get tack­les cer­tain risks to growth

The Pak Banker - - COMPANIES/BOSS -

The In­dian econ­omy is one of the few bright spots in the world in terms of growth. Gross do­mes­tic prod­uct ex­panded at a rate of 7.3 per cent in 2015, a slight ac­cel­er­a­tion com­pared to 2014's fig­ure and is ex­pected to see faster growth this year.

The In­ter­na­tional Mon­e­tary Fund (IMF), for in­stance, fore­casted growth rates of 7.3 per cent and 7.5 per cent in fis­cal years (FY, the pe­riod from April to March) 2015-16 and 2016-17 re­spec­tively.

The re­cent In­dian bud­get im­plic­itly as­sumes a slightly higher growth, at around 7.3 per cent and 7.7 per cent, ac­cord­ing to our es­ti­mates based on the govern­ment's nom­i­nal num­bers. In­dian growth will ac­cel­er­ate timidly in real terms over the next quar­ters, led by con­sump­tion and in­vest­ment, out­per­form­ing most emerg­ing economies. How­ever, there are some down­side risks. The three main fac­tors that could de­rail growth are price in­sta­bil­ity, loss of in­vest­ment mo­men­tum and vul­ner­a­bil­i­ties in banks' bal­ance sheets.

In­fla­tion seems un­der con­trol, but the lat­est im­prove­ments rely on low food in­fla­tion and en­ergy prices. Ad­verse weather ef­fects and a pick up in oil prices - which is en­tirely im­ported - could re­vive in­fla­tion­ary pres­sures, forc­ing the cen­tral bank to in­crease pol­icy rates and the govern­ment to spend more on sub­si­dies.

The political stale­mate, which is block­ing es­sen­tial re­forms, could also harm growth, as in­vestors could lose con­fi­dence on the im­ple­men­ta­tion of re­forms. In the past years, net for­eign in­vest­ment grew along with the econ­omy, from Rs1,108 bil­lion in 2011 to Rs2,112 bil­lion in the last four quar­ters. Los­ing re­forms mo­men­tum could hurt FDI and eco­nomic ac­tiv­ity.

Fi­nally, the IMF also warned about as­set qual­ity and low cap­i­tal ra­tios of state-owned In­dian banks, which might re­sult in in­suf­fi­cient qual­ity lend­ing and fi­nan­cial in­sta­bil­ity.

The bud­get for FY 2016-17 ad­dresses th­ese po­ten­tial risks to some ex­tent. The fo­cus on the ru­ral sec­tor is not only in­tended to im­prove the liveli­hood of eco­nom­i­cally de­pressed ar­eas, but also to se­cure food sup­ply and con­trol prices.

Projects such as ir­ri­ga­tion sys­tems, food stor­age fa­cil­i­ties and ru­ral road net­works are de­tailed in the de­vel­op­ments plans, and could have a pos­i­tive im­pact on price sta­bil­ity.

Be­yond ru­ral is­sues, en­ergy (29.2 per cent) and com­mu­ni­ca­tions (34.5 per cent) still rep­re­sent the bulk of the bud­get. Spend­ing in in­vest­ment in th­ese ar­eas will con­trib­ute to raise in­vestor con­fi­dence.

More­over, the bud­get in­cludes an al­lo­ca­tion of Rs250 bil­lion (11 per cent of com­mer­cial bank as­sets) for pub­lic banks to strengthen their bal­ance sheets. The govern­ment also stressed the com­mit­ment of list­ing pub­lic com­pa­nies in the stock ex­change, which could pro­vide ad­di­tional cap­i­tal and im­prove cor­po­rate gov­er­nance.

Down­side risks re­main con­sid­er­able, but the bud­get con­trib­utes to re­duce them some­what. How­ever, its re­lease did not come free of crit­i­cism.

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