Preventative care

Much good cholesterol in India's spending plan

Investors have been a tad too impatient in rating the Indian government's budget as unhealthy.

The slide in Indian equities on February 28 was a kneejerk reaction to, among other things, a 16.5 per cent projected increase in the government's total annual spending. That's faster than the growth in nominal GDP, which is projected to rise by 13.5 per cent.

But the details do not paint a picture of fiscal recklessness. Like cholesterol, government spending comes in both good and bad varieties. The increase announced by Finance Minister Palaniappan Chidambaram is largely because of a 37 per cent jump in public investments. This is the good cholesterol that the rapidly slowing Indian economy needs to avoid a seizure. Growth slumped to an abysmal 4.5 per cent pace in the final three months of 2012, the slowest in 15 quarters.

Investors should focus instead on the government's consumption spending - the bad cholesterol. This expenditure, which creates inflationary pressures, is forecast to expand by about 11 per cent, both a little slower than in the current financial year and less than the projected expansion in nominal GDP in the fiscal year that will start April 1.

With general elections due in 2014, it was unrealistic to expect the government to hit the brakes any harder on subsidies and other non-investment expenditure. But investors should give Chidambaram credit for not borrowing more to consume. The part of the government consumption that is not matched by revenue is expected to decline by 23 per cent.

Meanwhile, the boost to government investments is a welcome development. Indian companies are still nursing a debt hangover. While the budget allows companies to write down taxable income by 15 per cent of the big-ticket investments they make over the next two years, in the very short run the government will have to take the lead in capital formation. Without more spending on infrastructure, India's economy would have just become less healthy.

Execution might yet prove tricky. The $10 billion that the government intends to raise from selling stakes in state-owned companies may miss the target if appetite for Indian equities wanes. A rise in global crude oil prices could also threaten the plan to reduce fuel subsidies. Those risks apart, the budget does do a decent job.