The Aam Aadmi Party 67 out of 70 assembly seats, the Delhi electorate has shaken up the BJP, which got only the remaining three seats.
Finance minister Arun Jaitley, who is to present his Union Budget next week, has said this will not affect the pace of economic reforms. After all, the BJP was given a clear majority in the general elections on the promise of faster economic growth. The rallying stock market seems to keep faith in his words, but there are some things it would like to definitely see in his budget.
Fiscal deficit: The Finance Minister will likely announce that he has been able to meet the fiscal deficit target. This success is due partly to planning, partly to luck and partly to financial legerdemain. In planning, a better direction of subsidies will help bring down the deficit. He has been lucky that Saudi Arabia has obdurately decided to not cut production despite sinking crude oil prices. Lastly, the government has changed the base year for computation of GDP. The impact of this remains to be seen.
The Saudi strategy is working, for now. According to Jeremy Grantham of Boston-based GMO asset management company, crude oil prices are likely to remain in the $30-50 range for six months. So Jaitley must plan for the climb.
He could suck in the windfall from lower crude prices, through a hike in excise duties, only to progressively reduce the excise duty when crude prices start to rise.
Raising resources: The Government needs to expand its tax base (only 3% of the population pays direct tax). It has also committed to reducing corruption. This can be done by removing avenues for corrupt people to hide their black money. Offshore banks are one avenue. Tax-free incomes, whether agriculture or export or any other, are other avenues.
Privatisation versus disinvestment: The Government has recently announced it will provide `6,990 crore to nine of the 22 PSU banks (if SBI subsidiaries are taken as one). This is far too little; PSU banks need over `2 lakh crore to meet Basel III norms.
Instead, why not sell off smaller PSU banks like Vijaya, thereby raising more resources for a controlling stake, than piecemeal disinvestment? Why not keep a part of the sale proceeds as a fund for employees who would be replaced? The Government is not benefitted in any way by retaining majority control in so many banks. The safety of the financial system can be ensured by retaining control over the top 3-4 banks.
Privatised banks will vastly improve productivity and capital allocation. Profit declaration of banks like Union and Bank of India show a huge fall in profits before tax thanks to provisions made for non-performing assets (read bad debts).
Other than banks there are many businesses that the Government can dispose of. Air India is a prime example. Why should a country have a national carrier? Britain is none the worse off after privatising British Airways, why would India be different?
The current narrative indicates that Jaitley will credit `45,000 crore from divestment in the coming Budget. If the Government can go in for more privatisation instead, which makes national sense, there is no reason why this figure cannot be double.
Encouraging saving in paper assets: For a GDP growth of over 8%, there must be a lot of investment, especially in infrastructure. For this, household savings have to be encouraged, and a household savings rate of over 30% needed. A lot of this must flow into financial assets.
For this to happen, investors must feel safe in financial assets. This is needed to also wean them away from gold, which gives them greater comfort.
So the government has to act swiftly on financial fraud. If savers do not find paper assets safe, they won’t invest in them.
Before the budget, an external event may lead to a sharp fall in the market. Greece has, so far, been unable to strike a deal with the troika of World Bank, IMF and the ECB. And it is unlikely to. A Grexit (Greek exit from the euro zone) would hit both the country, as well as the European banks that have lent to it. Citibank, for instance, expects a 76% haircut on a Grexit.
Should such an event happen before the Budget, it could become a buying opportunity on the markets.