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Impact Analysis: Economy

Economic Growth

The Finance Minister has firmly reiterated his commitment towards reforms through his budget initiatives. The agricultural reforms are addressed by increasing the institutional credit flow to the sector from 15% to 24% and increasing the RIDF IV corpus by Rs 5 bn. Reforms in the agriculture sector will pave way for boosting industrial growth in future by enhancing domestic demand. Infrastructure development remains in focus with emphasis on reforms in the power sector through restructuring of SEBs. Furthermore increased plan outlay for other infrastructure sectors are expected to facilitate growth. Economic growth will be boosted by the fiscal responsibility shown through pegging of deficit at targeted 5.1% for the year 2000-01 and with a proposal to further reduce it to 4.7% in 2001-02, through expenditure management. Significant structural reforms like downsizing the government, widening of tax base and more serious commitment towards privatisation of PSUs have been reinforced. In the budget estimates for 2001-02, the growth in Plan Expenditure has remained stable at around 10.5%, non-plan expenditure growth has been pegged lower at 10.4% as compared to 11.6% growth in budget estimates of 2000-01. In addition to labor markets and infrastructure reforms, providing a conducive environment for growth, reduction in the administered interest rates will pave the way for lower interest rate regime in the economy. This is expected to provide further fillip for better corporate performance. The interest of the domestic industry has been safeguarded by the imposition of higher custom duties on goods stipulated to be removed from their import quotas.

We expect the budget initiatives to translate into a GDP growth of 6.5-7% in 2001-02.

Fiscal Deficit

The Finance Minister has managed to contain the fiscal deficit/GDP ratio at the targeted level of 5.1% despite the Gujrat earthquake catastrophe. This has been possible largely on account of expenditure management undertaken at the Centre. Both plan and non-plan expenditure are lower than the budget estimate of 2000-01. The decline in non-plan expenditure has been sharper, especially on capital account comprising defence expenditure and other non-plan capital. A substantial shortfall of 7% in customs collections and 3.2% in corporate tax collections vis-à-vis the budget estimate, has been compensated by 7.5% increase in the non tax revenue collections, thereby resulting in only a marginal, 1.2%, shortfall in revenue receipts. Although recoveries of loans have increased substantially by 9% against the budget estimate, PSU disinvestment proceeds have been considerably lower. The fiscal deficit/GDP ratio for 2001-02 has been pegged at 4.7% of GDP. Tax revenues are budgeted to grow at 14%, with corporate and income tax collections expected to grow at 14% and 15% respectively. Higher growth has also been envisaged in indirect tax collections. Non-plan expenditure and plan expenditure growth has been pegged at 10% for 2001-02. The lower target of fiscal deficit at 4.7% is expected to be achieved primarily by pushing forward the privatization programme, which is expected to garner Rs.120 bn.

Market Borrowing Program

The large amounts of government borrowing in the market is undesirable as it puts pressure on interest rates, crowds out private investment while also building both interest payment and redemption burden for future years. The total outstanding government debt today stands at around Rs 4430 bln. The ratio of interest payment to revenue receipts has been showing an increasing trend over the years. It has jumped up considerably to average around 50.7% for the post WMA periods as compared to 46.3% observed for the period 1992-97.

The market-borrowing program of the central government has been much under control for the year 2000-01. The net borrowings overshot the budgeted estimate of Rs 763.8 bln only marginally by around Rs 15.6 bln. The above performance is expected to continue with net borrowings estimated to be around Rs 773.5 bln for the year 2001-2002. Taking repayments on both dated securities and 364T-Bills, the gross borrowings are expected to be around Rs 1190 bln for the year 2001-02 as compared to Rs 1168bln budgeted for 2000-01.

Interest Rates

Financial year 2000-01 witnessed pressure in forex market leading to bearish sentiment in the government securities market. However, with the addition to liquidity through the mobilization under the IMD improved the sentiments. The bull rally in the government securities market gathered further strength following the fed rate cut, as it raised expectations of a similar move domestically. Overall the second half of the fiscal backed on impressive inflows through IMD and positive note by the central bank reinforced the upbeat market sentiment.

The budget 2001-02 has focused on the overall development of the secondary debt markets with special emphasis being made to align the administered interest rates with the market rates thus easing the interest rates in the economy and signaling a lower cost of funds for the government and the corporates. The reduction of most administered interest rates by 150 bps as of March 1, 2001 would provide a positive base during the fiscal and will build a case for relatively comfortable interest rate scenario during the year.

Exchange Rate

Progressively liberal measures relating to foreign investment have been proposed in the budget. Limit on FIIs investment under portfolio investment route has been increased to 49% from the previous limit of 40%. Likewise FDI in NBFCs will now be put on the automatic route subject to RBI guidelines. Several measures have been introduced to liberalize the capital account for corporates. All these measures augur well for foreign investment flows, both direct and portfolio. Consequently, we do not expect any significant pressure on the rupee.

Rediff-CRISIL Budget Impact Analysis
Budget 2001

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