EASY ECONOMY to a COMPETITIVE ECONOMY (series 1)

This year again we will see this same picture on 26th of Feburary 2010.Lots of hope and fate in that briefcase.Along with this US budget is also about get on the table within a next week followed with many countries budget. But we are already witnessing massive tremors of its upcoming budget earth quake.The tremors are so hard that the world equity markets have been rattled and saw a coming of like a house collapsed under earth quake. This year all the budgets of the world economies will be very focused and intricate as to whether start the strategies of exit of fiscal polices or to further stimulate the economic activities.In this series I will be sharing some of the insights of the expectation of each economies budget and its affects on the economy followed with the probale propsals that might come.

If we look country wise India is now on the recovery path of its economic roller coaster ride. It would be wrong to say recovery path in fact it have recovered and stared a fresh roller coaster economic ride.

IIP number and other sales of prime sectors have come up to the levels of 2007-2008.It have totally white washed the stains of recession from its wall of economy. The only concern is the inflation and the price of food items which have bought signs of wrinkles on the face RBI. We already know India have declared a host of stimulus packages. Now after a year old package specific points are normal to be forgotten. So let us recapitulate and then we will go with further insights. In the first stimulus which was declared on December 2008 and the second stimulus was on January 2009.Clubbing all the stimulus I have tried to bring forth the important one which we will focus in this 2010-2011 budget.

• Plan, non-plan expenditure of Rs.300,000 crore (Rs.3,000 billion/$60 billion) in four months

• Parliament nod to be sought for Rs.20,000 crore more toward plan expenditure

• Across-the-board cut of four percent in the ad valorem central value-added tax

• Interest subvention of two percent on export credit for labour intensive sectors

• Additional allocations for export incentive schemes

• Full refund of service tax paid by exporters to foreign agents

• Incentives for loans on housing for up to Rs.500,000, and up to Rs.2 million

• Limits under the credit guarantee scheme for small enterprises doubled

• Lock-in period for loans to small firms under credit guarantee scheme reduced

• India Infrastructure Finance Co allowed to raise Rs.100 billion through tax-free bonds

• Norms for government departments to replace vehicles relaxed

• Import duty on naphtha for use by the power sector is being reduced to zero

• Export duty on iron ore fines eliminated

• Export duty on lumps for steel industry reduced to five percent.

If we look clearly we hardly find any space for India government to further reduce the rates of indirect taxes. Since indirect taxes leads to lower cost of production and higher margins of profit resulting stock market going up followed with economy. But as the Indian government has reduced the indirect taxes followed with other measures. All these have made Indian government a fiscal deficit of 6.8% of GDP as per the last budget session. Its being expected that now this figure will jump further keeping some more sops declared from other sources from time to time and as more consumption grew to uplift the economy simultaneous growth in deficit also went up.

Now a question might come up how much it might grow and the reply is simple wait and see don’t go with imaginative figures.

We cannot expect more reduction in indirect taxes corner. The best it can be no change in tax rate or moderate change. But the factor of moderate change affect on companies and the stock market is the twist to be watched. India goes for some bold steps it might cost the Indian inflow of funds coming from overseas. Since they are looking for low cost and high growth opportunistic countries to invest. Even if the India takes bold steps then that might not be this suitable time. Since Indian economy has grown without the support of export, rolling back of reduced rates of indirect taxes might be a massive fiasco for India economy. Exports amount to 22% of India’s GDP. Gems and jewelry constitute the single largest export item, accounting for 16% of exports

Exports will take time for India economy to pick up. US and Europe were the prime exporting countries and now e know the status very well. The below chart shows the export of India in 2009.

Thankfully we have also changed out focus of export to other countries and some time it will take to pick up from end. Till then any action of Indian government which will damage the rising domestic demand of India.

So a moderate tax hike needs to be carefully watched to see the affects in the long term demand and cost competitiveness.

If we look into the current account of India we find India is struggling despite of a economic growth of 7%. A current account is a financial account with a bank or a financial institution. It enables account holders to make or receive an unlimited number of payments as frequently as they wish. Thus, current accounts are considered as an essential tool for businessmen. In 2006 we find the current account was hovering around 5% and which turned in 2009 July to -12.63.The below chart shows the current accout position of India.

Increased allocation of funds for infrastructure and others are all welcomed and will be present in the budget of 2010-11, but what about the cost of borrowing and the taxes. All these will exert pressure on the eocnomy. RBI will go for a rate hike and that will exert pressure on borrowings. So we will be getting a transformed into a COMPETITIVE ECONOMY from EASY ECONOMY. And this is applicable more fierce fully for other economies across the world.

We should not be betting on imaginative numbers of fiscal deficit numbers. We should not be making too much expectation from the market. What we need to do is to understand the invisible facts of any proposal brought forward to us. We need to look into the long term growth and not the short term tremors of the speculators of the market and economy. We should understand that a growth cannot be achieved at the cost of loss to some other prune areas of the economy. All we need is patience and in-depth analysis followed with a mind set of transforming the business activities from as EASY ECONOMY to a COMPETITIVE ECONOMY.