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The Union Budget 2004-05 Context and Impact

The Union Budget 2004-05 Context and Impact. Presentation at Delhi School of Economics July 30, 2004. Structure of Presentation. The Macroeconomic Context of the Budget Impact on Key Macro Indicators. Overall GDP Growth. Sector-wise GDP Growth. Drivers of Industrial Recovery.

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The Union Budget 2004-05 Context and Impact

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  1. The Union Budget 2004-05Context and Impact Presentation at Delhi School of Economics July 30, 2004

  2. Structure of Presentation • The Macroeconomic Context of the Budget • Impact on Key Macro Indicators

  3. Overall GDP Growth

  4. Sector-wise GDP Growth

  5. Drivers of Industrial Recovery • Critical background developments • Structural changes in interest rates • Revival of public capital spending • Retail Finance • Construction • Investment Upturn

  6. PPF and G-sec Rates

  7. PLR and Housing Finance Rates

  8. Revival in Public Capex

  9. Revival in Public Capex

  10. Growth drivers: From Auto and Construction to Capital Goods Manufacturing Sector Growth % 7.95 7.57 8.00 7.52 6.91 6.90 7.00 6.08 5.95 6.00 5.00 4.07 4.00 3.35 2.9 2.61 3.00 2.5 2.00 1.00 0.00 Q1FY02 Q2FY02 Q3FY02 Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03 Q1FY04 Q2FY04 Q3FY04 Q4FY04 -1.00 Basic Chemicals & Chemical Products Non-metallic Mineral Products Basic Metals Machinery and Equipment Transport Equipment Others Manufacturing Sector

  11. Budget 2004-05:Main Impressions • Clear signals of persistence with reforms • Major rural focus, with objective of de-risking agriculture • Revenue increases appear highly optimistic • Intent to address investment, competitiveness and subsidy issues in February 2005

  12. Rise in Plan Spending

  13. Growth in Plan Infra Spending 2004-05 BE (Budget Support + IEBR)

  14. Foreign Direct Investments—current status

  15. FDI – Expanding Space • Announcement to raise FDI limits in telecom , insurance unanticipated and a positive surprise. • Expected to enhance FDI inflows not just to these sectors but other sectors as well. • However, unless other bottlenecks for investment such as power costs, administrative delays resolved, sharp jump in FDI inflows unlikely.

  16. What does all this mean for growth? • In the short run, no significant triggers for acceleration, but no impediments either • Direct tax changes – higher threshold, but education cess – may neutralize each other as far as consumption spending goes • Increased spending will not have much impact in the remaining months of 2004-05 • Current momentum in industry and services sustainable • GDP growth for 2004-05 6-6.5%; Non-agri GDP 8% +

  17. What does all this mean for growth? In the long run: • Expanding plan expenditure on infrastructure will clearly contribute (even in medium term, as spending begins) • Roads programme continues, with sightly expanded allocation for the year • De-risking agriculture critical to stabilizing the contribution of this sector to growth • Hope from concerted thrust on investment climate and manufacturing competitiveness

  18. Revenue Arithmetic :

  19. Room for Slippage

  20. The Industry – Revenue Nexus

  21. What does this mean for the Fiscal Deficit? • Budgeted Fiscal Deficit of 4.4% of GDP as per the requirements of the Fiscal Responsibility and Budget Management Act • Our analysis shows that this is premised on highly optimistic revenue projections • Possibility of slippage of 0.6 per cent of GDP

  22. Inflation: Inching Up

  23. Inflation: Sectoral Trends

  24. InflationProspects • Inflation firming up in fuel and manufacturing; direct impact of budget marginal • Result of both demand and supply factors • Fuel and metal prices the cost push factors • Recovery in manufacturing is the demand pull factor • Prospects of inflation staying in the band of 5- 5.5 per cent. • International crude prices - a risk factor, but current outlook moderate

  25. ‘Push’ factors Harder US rates Sustained demand for domestic credit Slowdown in forex inflows affecting domestic liquidity. Anticipation of overrun in fiscal deficit ‘Pull’ factors RBI’s policy bias towards keeping rates low Current high levels of liquidity –estimated at Rs 75000 cr and Rs 90000 cr Moderate core inflation Domestic interest rates—pulls and pressures

  26. The interest rate momentum

  27. The interest rate view • Potential fiscal deficit overshoot of Rs 20000 crores and slowdown in forex inflows to drive interest rates up. • 100 bps increase in 10 year yields, 20-30 bps at the short end projected by year-end • Turnover tax on debt transactions to push up short-run volatility, reduce volumes

  28. The Rupee • US interest rate hike to drive re-alignment of global capital flows • Export growth prospects good, but domestic recovery also causing acceleration of imports • Rate of net forex inflows will slow • Rupee to remain stable in 45-46/US$ range for rest of the year

  29. Conclusions • Relief: Reforms are still on track, for now • Concerns: Unrealistic revenue expectations Criticality of delivery mechanisms • Hopes: Concrete solutions for investment, competitiveness and subsidy issues De-risking agriculture

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