SINGAPORE (Reuters Breakingviews) - Investors have been a tad too impatient in rating the Indian government's budget as unhealthy.
The slide in Indian equities on February 28 was a kneejerk reaction to, among other things, a 16.5 percent projected increase in the government's total annual spending. That's faster than the growth in nominal GDP, which is projected to rise by 13.5 percent.
But the details do not paint a picture of fiscal recklessness. Like cholesterol, government spending comes in both good and bad varieties. The increase announced by Finance Minister Palaniappan Chidambaram is largely because of a 37 percent jump in public investments. This is the good cholesterol that the rapidly slowing Indian economy needs to avoid a seizure. Growth slumped to an abysmal 4.5 percent pace in the final three months of 2012, the slowest in 15 quarters.
Investors should focus instead on the government's consumption spending - the bad cholesterol. This expenditure, which creates inflationary pressures, is forecast to expand by about 11 percent, both a little slower than in the current financial year and less than the projected expansion in nominal GDP in the fiscal year that will start April 1.
With general elections due in 2014, it was unrealistic to expect the government to hit the brakes any harder on subsidies and other non-investment expenditure. But investors should give Chidambaram credit for not borrowing more to consume. The part of the government consumption that is not matched by revenue is expected to decline by 23 percent.
Meanwhile, the boost to government investments is a welcome development. Indian companies are still nursing a debt hangover. While the budget allows companies to write down taxable income by 15 percent of the big-ticket investments they make over the next two years, in the very short run the government will have to take the lead in capital formation. Without more spending on infrastructure, India's economy would have just become less healthy.
Execution might yet prove tricky. The $10 billion that the government intends to raise from selling stakes in state-owned companies may miss the target if appetite for Indian equities wanes. A rise in global crude oil prices could also threaten the plan to reduce fuel subsidies. Those risks apart, the budget does do a decent job.
- The BSE Sensex fell to a three-month low on February 28 after Finance Minister Palaniappan Chidambaram said total government spending in the next fiscal year will rise 16.4 percent, more than the expected 13.5 percent increase in nominal GDP.
- The Central Statistical Office said the economy grew 4.5 percent in the three months ended December, its slowest pace of expansion in 15 quarters.
(Editing by Peter Thal Larsen and Katrina Hamlin)
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)