The timing of the Interim Budget is unfortunate. The incumbent government has chosen to respect the traditional format of a vote-on-account, and not gone beyond it. The market expected the goverment to invoke the extraordinary circumstances the world is facing and provide additional stimulus.
Having said that, the amount of fiscal stimulii the government pumped in during December and January — and adding what it announced during the Interim Budget — is likely to provide quite a bit of support to demand. But implementation of these measures holds the key to reviving the economy.
With respect to the fiscal deficit, the government has left the door wide open (for whoever comes to power) to provide more stimulus to the economy. We now see the combined bond issues and cash budget comprising 7-7.5 per cent of the GDP.
There’s a lot of liquidity in the market. Although duration is a problem, private sector credit would be slow to pick up, hence there would not be much fear about bond yields rising sharply in the first half of the fiscal year.
The second could see yields firming if the economy and credit growth recovers. It would be awkard for the government to announce sops like tax concesssions outside the Interim Budget since they have chosen to remain within the confines of the vote on account.
Jahangir Aziz, Chief Economist, J P Morgan India