Jamal Mecklai: Full speed ahead

MARKET MANIAC

Perhaps, the most important aspect, certainly when compared with earlier Budgets, was the fact that there was no sense of distrust on the numbers.

While this is not Mr Chidambaram's singular achievement""I would say the sense that the numbers are fudged has not been around for at least two, maybe three, Budgets""the point is that the excellent performance of the Indian economy has given a special shine to our policymakers.

The good news is that they appear to understand that making strong growth sustainable requires broadening the base, and the Budget was high on employment generation, health, and education.

While, of course, all Budgets make similar noises in this direction""by definition, every Budget is loudly political""I believe there is evidence that the efforts to improve delivery are bearing fruit.

While sitting in an air-conditioned office in Nariman Point is hardly the right place to make that judgment, I feel that the apparent success of the programme of linking self-help groups to the banking system, which was started in the last Budget, provides evidence that the delivery of services may be improving.

In fact, I found the proposal to enable qualified NGOs involved with micro-finance to access external commercial borrowings both dramatically radical and also evidence of commitment to micro level delivery.

The strong, continuing focus on education is another extremely heartening theme. While, as always, the real value is in the implementation, the finance minister's commitment to education""from the substantial increase in resources committed to primary education to a knowledge centre in every village to agricultural research to upgrading trade schools to creating world-class institutions of higher learning""at least shows that he understands what the priorities are.

The stock market's enthusiastic reaction to the Budget confirms that corporate India, too, is shifting away from its "cautiously optimistic" mood. Clearly, India is""and has been""on a roll for some time.

I must have spoken to 150 or 200 companies in the past six months and only one""just one""of them expected this year's performance to be behind expectations.

There were some concerns, of course. For instance, some garment and textile players were concerned that with the strengthening rupee, their margins were being squeezed viciously and unless the government were to ease labour restrictions, they would be ill-equipped to deal with the huge opportunity coming India's way with the end of the Multi-Fibre Agreement.

Well, guess what?

As if it had heard these specific concerns, the government announced that it was planning changes in labour rules specifically for the textile sector and, in the Budget, the finance minister just laid out more goodies, from a continuation of the Technology Upgrade Fund to a new capital subsidy to the dereservation of certain segments, and so on.

Clearly, there's not much left to ask for, at least for the textile sector.

Exports, which, in any case, have surprised the government""April-to-January growth was 25.6 per cent, much higher than the 16 per cent target""are sure to surge along, bringing renewed upward pressure on the rupee.

The RBI has been hard put to contain the rupee's strength""in the week to February 18, reserves increased by nearly $3 billion, one of the highest instances in reserves growth on record.

And they will doubtless continue to keep buying dollars, particularly as inflation has eased to around 5 per cent, which means they can afford to pump in liquidity without too much concern.

Actually, with the economy going at full throttle, one of my concerns had been that inflation would be a major issue over the next year or so. Like most people, I believed that interest rates would rise domestically, perhaps putting a bit of crimp into economic growth far earlier than warranted.

In my view, one of the best aspects of the Budget was the cut in indirect taxes, which will provide a healthy balance to this incipient inflationary trend; this will make it easier for the RBI to keep up its dollar buying if they wish to prevent the rupee from appreciating too rapidly in the near term.

Of course, judging from the 32.7 per cent rise in non-POL imports and the surge in overseas investment by Indian manufacturing""notably, pharma, auto, and auto components""it would seem that the rupee is now extremely well-valued, which may explain why the RBI has been so (apparently) desperate to keep it from appreciating further.

In fact, as we have argued often before, the RBI needs to find ways to make the market more liquid so that companies are able to more effectively manage the risk on their foreign currency exposures.

While this is really a matter for monetary policy, the Budget did provide some fairly loud indicators that our economic managers understand the need to accelerate the development of financial markets.

Mr Chidambaram talked about the need to increase the size and strength of our banks (this comment takes on added significance after the statement a few days earlier on the need to change HR policies in the public sector banks), and to reinvent Mumbai as a global financial centre.

He also committed resources for infrastructure development in Mumbai, which is a necessary condition for any real global growth of the country.

Importantly, he made some long overdue micro-changes in the financial sector""rejigging the Securities Contract Regulation Act, eliminating stamp duty anomalies, acknowledging that profits/losses made in derivatives transactions should be considered as regular business gains/losses, and, at long last, okayed a gold unit scheme.

It would seem clear that the monetary policy""in about a month""will take some more steps. Full speed ahead!