Monday, July 6, 2009

India's budget takes the wrong turn

The word "pork barrel" is probably inappropriate for India, but that's exactly what's in the new government budget. From "fertilizer subsidy" to "welfare of workers in the unorganized sector". All useful stuff, but will force India into a serious budget deficit.

From the Government of India (Union Budget):

To counter the negative fallout of the global slowdown on the Indian economy, Government responded by providing three focused fiscal stimulus packages in the form of tax relief and increased expenditure on public projects along with RBI taking a number of monetary easing and liquidity enhancing measures.

Fiscal accommodation led to an increase in fiscal deficit from 2.7 per cent in 2007-08 to 6.2 per cent of GDP in 2008-09.

Learning from the US to spend money one doesn't have is probably not the right direction to take. In the long run this will hurt India, because once something is in the budget, politicians will have to keep it in to get re-elected. If the economy doesn't grow at the rate they forecast, India can get caught in a deficit spiral.

For now India's government will find numerous buyers for the new debt, but that may not always be the case. The market immediately signaled it's disappointment:


INR vs. USD:

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