Infrastructure holds key to economic growth: Budget 2011
February, 21st 2011
After the steep fall in the indices last month due to macroeconomic concerns, the stock markets are looking forward to the forthcoming Union Budget as an event that could fix some of their troubles. The markets will look up to the Finance Minister to mitigate some of the macroeconomic problems affecting the country at this juncture. India was one of the first countries to implement the stimulus programmes to pull the economy out of recession.
As a corollary, India is again one of the first countries to face the problem of inflation that comes with a high growth rate and high liquidity. The challenge the Finance Minister now faces is how to control inflation without affecting growth. Investors expect three major things from the budget - controlling inflation , controlling fiscal deficit and investments in infrastructure.
From the second half of 2010, the inflation rate has been a major issue in India. Inflation reached uncontrollable levels in the second half of 2010, not due to the stimulus alone. Rising commodity prices due to supply side constraints was also a major contributor. Globally, prices of commodities rose whether it was metals or agri commodities like coffee, sugar and cotton. This led to the rise in food inflation.
Investors will appreciate the Budget if the Finance Minister addresses some the bottlenecks that constrain supply of agro commodities. The main problem that the agri commodities sector faces is logistics. Lack of proper roads for fast and easy transportation of perishable goods, and good quality cold storage chains are the bottlenecks that have to be removed immediately. Allowing large investments in this sector will transform it, leading to efficient use of resources and minimising wastages.
This government wants the country to grow at double-digit rate but is providing infrastructure that is bursting at the seams today. Be it traffic jams inside any large city in the country or near collision of planes at airports, the capacity of all types of infrastructure is constrained. This is not due to lack of allocation or lack of financial commitment but due to lack of execution. Operational level difficulties are faced in obtaining several clearances for land, environment etc causing further delay in project execution, and cost over-run.
Currently, infrastructure sector faces issues like higher commodity prices and higher cost of funds. India desperately requires large capacity additions in roads that can transport higher capacities, and more investments in power. Hence, investors are expecting a renewed emphasis on execution of existing projects and further enhancing public-private partnership projects that help in cost mitigation
The lack of control over the fiscal deficit is said to be of the major reasons for foreign institutional investors (FIIs) withdrawing their investments this year. As there is no sale of assets planned for this year, investors fear there is a risk of slippage and an unexpected rise in the deficit. The main direction for fiscal deficit was set at the last Budget by the 13th Finance Commission .