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Posted by: Deepa Vasudevan on Wed, Feb 27th, 2013

BUDGET 2013-14: The Good News, The Bad News, and The Worry

CURRENT ACCOUNT DEFICIT

 

The Good News

Current account deficit is being comfortably financed by inflows on the capital account

 

The Bad News

Current Account Deficit was at 4.2% of GDP in 2011-12 and 5.4% of GDP in Jul-Sept 2012, higher even than during the BoP crisis of 1990-91.

 

The Worry….

Capital inflows are dominated by FII inflows, NRI deposits and corporate loans. These are volatile and can quickly reverse in case of any external or domestic crisis

 

INFLATION

 

The Good News

WPI inflation for January 2013 at 6.6% was the lowest in 3 years. Core inflation also down to 4.1%.

 

The Bad News

The new comprehensive Consumer Price Inflation number remains at 10% levels.

 

The Worry….

Food inflation remains high, and this shows up in CPI which gives higher weights for food. Rising food prices hurt consumers directly, especially the poorest. And if people have to spend more to consume the same food, they are likely to save less.

 

BANK LENDING

 

The Good News

Bank Credit grew by 14% plus levels on a y-o-y basis in December 2012. Since credit typically picks up in the last quarter, final growth should be close to RBI's target of 16% for 2012-13.

 

The Bad News

Aggregate deposits grew by 11% y-o-y for December 2012, and merely 7% during this financial year.

 

The Worry….

The wedge between deposits and credit will grow larger, forcing banks to search for non-deposit sources of capital. Poor deposit growth makes it harder for banks to pass on the benefits of interest rate cuts by cutting deposit rates

 

INTEREST RATES

 

The Good News

After more than a year of waiting, key policy rate was cut by 25 basis points

 

The Bad News

Gross domestic savings rate declined to 30% of GDP in 2011-12, a fall of 4% from the previous year. Financial savings of households has fallen to 8% of GDP, and physical savings in real estate and gold shot up to 14%

 

The Worry….

Even if interest rate cuts were to spur investment, the funding will come from overseas as domestic savings will be insufficient. Greater dependence on external savings increases external vulnerability.

 

FISCAL DEFICIT

 

The Good News

Several steps being taken to ensure fiscal deficit target of 5.3% for 2012-13 is achieved. This includes significant cuts in government expenditure.

 

The Bad News

The Food Security Bill, which is expected to be cleared this budget session, will require a subsidy provision of Rs.1.2 trillion in the next year. This will effectively wipe out all the savings achieved through spending cuts.

 

The Worry….

Lowering fiscal deficit by cutting revenue and capital expenditure may hurt long run growth prospects. But if fiscal deficit is not cut quickly, India faces a sovereign ratings downgrade to non-investment grade. That would dry up capital inflows, reduce investment, and create a BoP crisis.

 

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