A Collective Sigh of Relief - Deloitte

At a time when the government can ill afford
deterioration in its current account deficit,
recent policy proposals seem, at the very least,
badly timed.
last year’s 50.1 percent. The finance minister also proposed
to reduce outlay on subsidies to below 2 percent of GDP
from the current level of 2.5 percent. However, skeptics
believe that the targets and measures proposed are neither
spectacular nor attainable. It has been argued that the
government has neither the political desire nor support
to reduce subsidies on food, fuel, and fertilizers, apart
from pushing through important policy reforms that are
important for fostering growth. Furthermore, the Goods
and Service Tax, the much-vaunted plan for fiscal consolidation,
is pending the resolution of key issues regarding
the division of revenues between the center and the states.
In the run up to the budget, foreign investors had looked
to the government for policies that would aid investment
in India. However, post budget, there is increasing worry
that recent government stances on foreign investment
may not be tolerated by foreign investors. The government
introduced a proposal that will allow tax authorities to
crack down on companies that may have structured deals
to avoid taxes. Firms, Indian and foreign, that have routed
their investment in India through Mauritius are potentially
under scrutiny. Another proposal to tax cross-border deals
involving the transfer of Indian assets, with retrospective
effect stretching back until 1962, is worrying current and
potential investors. At a time when the government can
ill afford deterioration in its current account deficit, recent
policy proposals seem, at the very least, badly timed.
India
Few policy options
Inflation, the barb that had threatened to derail India’s
growth for several months, had been on the decline over
the last several weeks. Inflation dropped to a 26-month
low of 6.5 percent in January after remaining above 9.0
percent for much of 2011. However, inflation is on the rise
again, and it is likely to stay in the 7.0–9.0 percent range
in the coming months. The central bank cannot afford
to conclude that the inflation will stabilize in the medium
term. In fact, the central bank has announced that it
would be “premature” for it to start reducing interest
rates without seeing any abatement of inflationary threats
exerted by the high fiscal deficit and global energy prices.
Thus far in 2012, the central bank has already eased the
reserve requirements for banks, infusing liquidity into the
economy. It is likely that further liquidity could be infused
into the economy in the coming months. Measures to
ease liquidity may, however, not be enough to provide
a much-needed fillip to the economy. Growth is slowing
down, investment is falling, and business sentiment is
on the decline. Absent any credible government action,
the central bank may not be able to stave off calls for
reducing the interest rate for too long. In the final analysis,
questions about whether or not the interest rate will be
reduced are giving way to when and how dramatically it
will be cut.
Geographies
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