What Jim Walker and Stephen Roach expect from Budget

As Finance Minister Pranab Mukherjee readies to present the most important economic event of the year, Union Budget 2010-11, CNBC-TV18’s Udayan Mukerjee speaks to one of the world’s most influential economists, thinkers and market men on how they expect it to pan out. More importantly, they dwell on what the FM could do on parameters that concerns India the most at present: inflation, growth and fiscal policies.

Fiscal deficit and consolidation

Jim Walker, Managing Director of Asianomics, said if the government decides to increase its subsidies to the poor — food, fertiliser and fuel — it would make the deficit worse.

“Hopefully, the Budget will take a stance in the view of the direct tax code, and it is important for the tax efficiency to increase.”

The country’s fiscal deficits, taking into accounts the states, stands at 11% of the GDP, Walker said, and the government must target to gradually reduce the gap by 1% each year for the next three-four years, he said.

“Given the potential recovery in the private sector and private sector demand for money, if that message is not sent clearly, interest rates will rise and markets are going to be in a much weaker state.”

For global investors, Walker said a country’s fiscal position was the single most important reflection of its health though he said developed countries — which are running a yawning gap due to the liquidity infused to stimulate economies — were worse off.

“Emerging markets can cover up their total debt position quite well, China being a very good example in that respect. But people are focused on the fiscal deficit in India. They want to see a commitment coming down overtime,” he said.

Stephen Roach view

“I do think this is a terrific opportunity for the new government to lay out very important data points in terms of where its policies on the economy are likely to be headed over the next few years,” said Stephen Roach, Chairman of Morgan Stanley Asia, “Whether it has to do with fiscal consolidation, tax reforms, divestments, infrastructure commitments and I would hope that we would see some very clear statements in all of those areas.”

Roach said it now that India was well on its way to recover from the global financial crisis of 2008-09, it not longer “makes sense” to leave fiscal and monetary policies at the emergency sense.

“We think that the finance minister will target a deficit of around 5.5% for the year ending March 2011 and that is certainly a palatable reduction of about 1.3% points of GDP from the 6.8% deficit figure,” he said. The Indian economy is strong enough to be able to withstand such a modest consolidation, he said.

Even as business in India was not that hit by the global squeeze in credit cycle in 2008, Roach pointed out the stock markets were. “Should there be another sharp correction in emerging market equities, India will certainly not be unscathed. But I think investors in large part remain quite interested in India as a long-term economic growth and development opportunity.”