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April - May 2008
A Tale of Two Economies
There is spring in the air and the finance ministers of India and the United Kingdom (here he is known with the grandiose title of the Chancellor of the Exchequer) have, as usual, employed in their annual budget sticks and carrots to stabilise, sustain and accelerate their economic growth.
For me, it was a great experience to see the reaction of media, the politicians and the common man in two countries within a period of twelve days. I was in New Delhi on 29th February listening to the budget speech of Mr P. Chidambaram, the experienced finance minister of India, flamboyantly giving away millions of Rupees to farmers, reducing excise duties on cars and other luxury goods and even reducing the tax burden of burgeoning middle class.
On Wednesday, the 12th of March, I was in London, listening to Alistair Darling presenting his first budget in his monotonous, drawling voice. The theme of Alastair Darling’s budget was “a responsible budget that sought to maintain stability for Britain’s economy in the face of global insecurity.” He emphasised, without much emphasis in his tone, “With low inflation, record levels of employment and unemployment at its lowest level for a generation, and with the action taken last year to curb inflation, Britain is better placed than other economies to withstand the slow-down in the global economy.”
P. Chidambaram of India, in his speech, emphasised that the budget was all for the creation and distribution of wealth. It was meant to control inflation and bringing price stability without stunting growth.
While Alistair Darling was hoping for an economic growth of 1.75 to 2.25 %, Chidambaram was confident that India’s growth story was intact. He predicted that the economy would grow by 8.8% in this fiscal year. He said that investment was booming and “Indian firms have raised unprecedented money in the capital market.”
Who is more Eco-friendly?
Alistair Darling introduced a series of measures aimed at reducing the UK’s carbon emissions, including a new zero rate of car tax to be levied in the first year for new, low polluting vehicles, a measure that was just part of a wider reform of vehicle excise duty. As a safeguard against ‘credit crunch’, the Chancellor declared that a 2p increase in fuel duty will be postponed from April to October 2008.
Chidambaram announced plans to set up a permanent institutional mechanism to promote environment-friendly technologies and ideas. The allocation for the ministry of environment and forests has been increased from Rs.1539 crores in 2007-08 to Rs. 1,707 crores in 2008-09 (10.9%) and for the Project Tiger programme from Rs. 61. crores to Rs. 72 crores. (increase 17%).
While economic growth forecasts have been 1.75 to 2.25%, Alistair Darling gave parliament the uneasy news that public borrowing will increase to £43 billion for the next year, almost £7 billion more than 36 billion had had earlier anticipated. CBI Director General Richard Lambert commented, “The Government has much to do if it is to win back its enterprise credentials, but the measures announced are a credible first step on the road.”
Sunil Mittal, Chairman and group CEO, Bharti Enterprises said, “By and large, the Budget was very much in tune with industry expectations. It presents a win-win situation for everybody.”
The most far-reaching effect of the budget presented by Mr. Chidambaram would be felt in the rural India where 75% of the population lives. Apparently, waiving of Rs. 60,000 crores in agricultural loans to farmers seems dramatic; but in fact it constitutes only about 4% of total bank loans to rural sector. It excludes all those farmers who own over two hectares of land.
But the waiving of bank loans to farmers is, in fact, not so different from what Mr Alistair Darling did when he rescued Northern Rock Building Society by pouring £100 billion of tax payers’ money. It was meant to rescue British banks and building society from ‘credit crunch’ looming on the horizon. In no way do these handouts help the growth of economies.
Mr. Chidambaram has lost a great opportunity when he failed to give a kick-start to infrastructure sector, the very core of fast economic growth. SREI Infrastructure Finance vice-chairman and managing director Mr Hemant Kanoria said the sector anticipated restoration of tax benefits under section 80(I). “There isn’t anything significant in the budget. We were expecting some measures so that retail investors in the sector would get maximum returns,” he said. Although the budget did not offer much to the infrastructure and real estate sector, it did grant a five-year tax holiday to hotels in UNESCO-declared world heritage sites. Similarly, Healthcare and pharmaceuticals sector got a five-year tax holiday for setting up hospitals in Tier-II and III cities.
To conclude, India’s finance minister was planning his budget with an eye on the election, which now may be inevitable in winter 2008. In Britain,Mr Darling, on the other hand, was sure that he would get another opportunity in March 2009 to prove his economic efficiency and, thus, salvage the reputation of his prime minister and the party which at this juncture is in doldrums. Gordon Brown, as Chancellor of the Exchequer for almost ten years, in no small way contributed to three successful victories of the Labour party under Tony Blair.
It is doubtful that in spite of Chidambaram’s give away budget, the UPA government under Manmohan Singh (or is it Sonia Gandhi?) would survive.
India’s GDP at present is hovering around Rs.44000 crores. $1US= Rs40 or £1=Rs80 approx.) I.e. approx. 1.1 trillion US$ or £550 billion. (10 lakh=one million: 1 crore=10million). British GDP is approximately £1470 or US$2.8 trillion. The economic growth of India in Jan08 was 5.5%.
Here is what HSBC said about India in their ‘Latest monthly market trends’ March2008.
India: putting the bull on hold
We have been longstanding rupee bulls. But it is time to put this view on hold for a while. The INR has gradually lost support over recent weeks as equity inflows have slowed, oil prices have risen, and the domestic growth/inflation mix has deteriorated (for a country with so much risky capital at work this is not as straightforwardly currency positive as elsewhere in Asia). Against this backdrop, the limitations on ECBs introduced last August and foreign equity selling, have encouraged an onshore dollar shortage, which has prevented FX-forward-implied interest rate differentials from widening as US rates have declined, and hence are quite different from what we have seen in the rest of Asia. The fresh rise in oil, and still fragile global conditions, suggest that this move higher in USD-INR should persist in the near term.