MoF Bullish on Budget Impact

Mukherjee unfazed as markets, investors pan his seventh budget

A sense of disappointment at the reaction to the budget is palpable in the corridors of the North Block, the cavernous buildings that house the offices of the finance ministry. But its most important denizen, Finance Minister Pranab Mukherjee, is quietly confident that appreciation will soon follow. 

On Friday, the initial reaction of the market was negative with the Sensex declining 209 points while media and investor reactions ranged from lukewarm to hostile. Global coverage has been dominated by the decision to tax overseas mergers, potentially reopening a $2.2-billion tax dispute with Vodafone that many believed had been settled after the Supreme Court ruled in favour of the telecom company. 
On Saturday, Mukherjee, who had angrily chided the Opposition after the rail budget fiasco for behaving like "petulant children", was in a relaxed mood though some of his officials seemed downcast. He told reporters the budget was not the appropriate forum to push reforms that required broad political consensus. UPA Govt will Build Consensus on Reforms 
The UPA government will start building consensus on reforms — in particular the need to cut subsidies on petroleum products — once the Budget Session ends, and Mukherjee stoutly defended his decision to tax more services even if it turned out to be a tad inflationary. The budget had taken tough decisions and election results had not influenced him, he said. 
"This year I had to raise excise duty and service tax rates from 10% to 12% to mop up additional resources…But this is not a new tax which has been imposed…we had to do it keeping fiscal consolidation in mind," Mukherjee said. 
HDFC Bank Chief Economist Abheek Barua felt the budget was more credible in terms of numbers but disappointed when it came to measures that will spur investments. It may have failed in becoming an assertive document but it is far more realistic, he said. 
Last year, the finance minister had budgeted expenditure growth of just 3.6%, a number that markets found unbelievable and officials were hard-pressed to explain. But there is confidence this year that the budget's core numbers are attainable. 
For 2012-13, Mukherjee has assumed a 13.1% rise in expenditure, a target officials feel is within reach. The finance minister said he was confident of bringing down fiscal deficit, the gap between overall expenditure and revenue, to 5.1% of GDP in 2012-13. 
"Even if the world economy goes sour, the target will not change…It is indeed a very credible target," said Chief Economic Advisor Kaushik Basu. 
The FM's confidence seems to have perked up senior ministry officials, who were disappointed with the market's less-than-ecstatic reaction to Mukherjee's seventh budget. 
"We had put in a lot of thought," said a visibly disappointed senior finance ministry official before rattling off a long list of things he claimed that experts and markets had missed. These include easier access to foreign borrowings for troubled industrial sectors, removal of investment restrictions on venture capital, a firm commitment to control fiscal deficit, an expanded list of sectors characterised as infrastructure and incentives to invest in equity. 
"These measures will generate economic activities and improve business sentiment, which will generate more demand," the official said. The government has projected 7.6% growth in 2012-13 and 8.6% in 2013-14, well above private estimates. 
Another senior official of the ministry said he did not share the skepticism. "If you look at the overall macroeconomic situation, what else could the government have done?" he asked.