Economic Survey Emphasises Sustained Reforms Action

Like every year, before the Budget day, the Ministry of Finance, Government of India, comes out with the Economic Survey, which serves as an indicator of the actual economic health of the country. Raghuram Rajan, the Chief Economic Advisor to the Finance Minister, tabled the key findings of the 2012-2013 survey, which lifted the overall sentiment of the equity market and helped the bourses to recover some of its early losses.

The survey emphasised on continuing the reformist measures that the government has started since mid-September 2012. Further, the survey said that the economic health of the nation (GDP growth, moderation in inflation) would only improve if the reformist action is continued by the FM in the Budget 2013-14.

Some of the significant points extracted from the Economic Survey (2012-2013) are as follows:

• Reforms action is the need of the hour to improve the economic environment of the country.
• With the global economy also likely to recover somewhat in CY 2013, it should help in improving the Indian economy's outlook for 2013-14. GDP growth for FY2014 is estimated in the range of 6.1-6.7%. We believe that the economy would growth around 5- 5.5% in this fiscal year (FY2013). 
• The survey expects the Wholesale Price Index (WPI) inflation to be in the range of 6.2-6.6% by March 2013.
• The WPI has seen a declining trend over the past 4-5 months. The survey said that apart from Monetary Policy attempting to control demand (higher interest rate help by the RBI would result into slowing of demand), positive move on supply side (reducing infrastructure bottleneck) will be crucial to bring down inflation going ahead. For this, ongoing policy initiatives need to be pursued.
• Widening of the tax base and prioritising of expenditure are key factors for controlling the fiscal deficit. With this in view, we may see a higher tax for individuals being announced in the FM’s Budget speech tomorrow, which would boost the revenue side. On the other hand, there would be a reduction in subsidy, which would reduce the expenditure burden helping the country to curb its deficits.
• The consequent slowdown, especially in 2012-13, has been across the board with no sector of the economy remaining unaffected. A falling savings rate without a commensurate fall in aggregate investment have led to a widening current account deficit (CAD).
• The balance of payments has also been under increasing stress recently. Exports have declined while imports have not fallen significantly, resulting in increasing trade and current account deficits. 
• Though capital flows are bridging the gap, the nature of portfolio capital may lead to greater potential of financial fragility and also rupee volatility. This means that there is a huge amount of foreign inflows in the country but from Foreign Institutional Investors (FIIs) and not from Foreign Direct Investments (FDIs).

Overall, the survey has pegged its estimates for growth in FY14 based on an assumption of continued reformist action. We believe that the FM would present a reformist Budget 2013-2014, which will bring the economy back on the growth path. If the FM fails to do so and comes out with a populist Budget (considering that the elections are close at hand), market participants would give a thumbs down and we may see stiff selling. In fact, to hit the bull’s-eye, the FM would need to lay out a clear roadmap to bridge the ‘twin deficits’ (fiscal deficit and current account deficit).

Needless to say, tomorrow will be a day of high volatility in the markets as we have three major events lined up – The Union Budget 2013-2014, the GDP data for the Q3FY13 and the February 2013 F&O expiry. Risk-averse investors should apply a wait-and-watch strategy but risk-takers could go with the straddle options strategy.

We would be updating live feeds as the budget rolls out and would analyse the budget and its impact. Do keep tabs on this page and our budget page.