Nothing seems to be going right for the markets. The recent elections in five states gave a clear thumbs down to the Congress party, heightening the fragility of the UPA government. Its chances of lasting a full term have further diminished. The fiasco about the rail budget and rollback of the proposed increase in passenger fares further signalled that reforms under UPA-II remain a distant dream and any expectations of rationalisation of diesel prices appear over-ambitious. The Reserve Bank of India in its mid-term monetary policy review is still not convinced about inflation, which was enough to warrant a rate cut, and has actually gone by a CRR cut only to release much-needed liquidity.
The Union Budget talked of all good things such as tax on gold, Rajiv Gandhi Equity Scheme, cutting the fiscal deficit to 5.1 per cent by borrowing less and capping subsidies.
But the proposals in the finance bill have little to show that the Finance Minister honestly wants to walk the talk. For instance, it is highly unlikely that the fiscal deficit may be cut to 5.1 per cent – a figure that can be achieved only in the best case scenario. The budget has placed heavy reliance on revenues without doing enough on the expenditure side. Besides rolling back excise cuts and the hike in service taxes, it expects to collect substantial sums through non-tax revenues such as disinvestment, the auction of the 2G and 4G telecom spectrum, licence fee and also auction of coal mines, etc.
Most of these revenues are based on the assumption of a GDP growth rate of 7.6 per cent and the economy and markets remaining in a good condition. But a combination of high inflation, which is on the rise again, slowing domestic demand and weak exports may not allow the GDP to grow beyond 7 per cent, making these revenue estimates a bit too optimistic.
The fiscal consolidation that heavily relies on asset sale and not through raising of revenues by taxes may not give comfort to the RBI, which may decide to hold back on the much expected rate cut in its annual monetary policy on April 17. The proposed reduction in fuel subsidy also does not appear credible. ......READMORE : http://www.gfilesindia.com