It is really amazing to see how big a difference six months and a new Finance Minister (FM) can make. In September 2012, when the new Finance Minister took over, the economy was on the brink of a disaster. Chidambaram’s predecessor, after budgeting a fiscal deficit (FD) of 4.6% for FY12, ended up at 5.8%. For FY13, he budgeted for a deficit of 5.1%, but the underlying arithmetic was so dodgy that no one believed the numbers and rating agencies put the country on ratings watch.
The Kelkar Committee set up to provide a new roadmap for fiscal consolidation in September, projected the year to end with a FD/GDP of 6.1% in a “do nothing” scenario. Rating agencies would surely cut the sovereign rating to junk in that case with disastrous implications. With a Current Account Deficit (CAD) of close to 6% of GDP, the country needs capital flows of around $250 million every day to fund it. It is akin to running on a really fast treadmill. A halt in capital flows can have disastrous consequences for the economy and markets.
Apart from appointing the Kelkar committee, the FM also readjusted the FD target for FY13 at 5.3% and went about getting it in right earnest. What followed was the most severe case of belt-tightening that we have seen in recent times. Plan expenditure took the biggest hit and ended up growing just 4% as against the budgeted 26%. To give credit where it is due, the FM managed to end the year with a FD/GDP ratio of 5.3% and has targeted 4.8% for FY14. As a result, it clearly defines a well thought of fiscal consolidation road map.
While S&P has silently nodded at the budget, Fitch has been more critical and threatened a downgrade. It is difficult to imagine what is it that Fitch is expecting the government to do? But, we believe this is the best that could be done under the situation and should give comfort to RBI to ease the interest rates while keeping a close watch on the CAD.
On the other hand there are critics who find the budget too workman like and lacking a grand vision to propel the economy to 9% GDP growth. But one needs to be realistic here. Where are the resources or even the capacity to grow at 9% in this austere global environment? The country needs to get accustomed to this new phase in its economic journey, when it will grow at a moderate pace, led by investment rather than consumption.
During this consolidation phase there is no quick money and one has to keep expectations from the market under check. However, this is also a phase when there are enough value stocks available and few of them will emerge as blue chips when the growth comes back in a big way. One needs to have the courage and conviction to stay invested in those stocks and be patient.
The author is Chief Investments Officer, AEGON Religare Life Insurance. The views expressed are personal.
