The finance minister has unveiled a credible plan to bolster growth and investment in India. The Budget deficit is forecast to shrink to 3.9 per cent of the GDP in 2015-16 - the smallest shortfall since 2008, although it is higher than the previous ambitious goal of 3.6 per cent of the GDP.
Doubtlessly, the Indian government is now seeking the trust of global investors with the country's currency and stock market being among the best performing of the emerging markets. But there is cautious optimism. There are visible signs that the government is committed to shift spending from subsidies to infrastructure to bolster efficiencies, and, in turn, underlying productivity. However, we are mindful that much of the Budget strategy hinges on whether or not India's competitiveness improves and this includes the stability of the country's sovereign rating.
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The monetary policy outlook for India is highly dependent on the integrity of the fiscal policy framework. So, it will be crucial that the government sticks to its discipline in terms of reducing both the Budget and current deficits in relative terms. Moreover, we are mindful that the RBI regards the plunge in global crude oil prices not only as a welcome tailwind for the Indian economy, but also as a factor that provides the government with some degree of policy flexibility in dealing with deep-seated structural issues.
Global Head, Macquarie Securities