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Growth at the cost of fiscal prudence
Fri, 2 Jan Pre-Open

The year 2014 has been a year of turn around for stock markets and overall sentiments in the economy. And while the Modi Government has shown some resolve towards reforms, the risk to reward ratio seems to be skewed in the favor of the former. This is because most of the expected growth in the earnings has already been accounted for in the current valuations.

As far as top down approach is concerned, we believe there is a reason for investors to be cautious. Much of the optimism in the markets is based on expectations of an infrastructure revival. However, disappointed by the past experiences, the Government this time is averse to rely on private sector for the same. The latter has already earned a bad name for stalled projects in the infra space. To make matters worse, huge amounts have been borrowed by private sector to fund these projects. This has put under pressure the balance sheets of not just private entities, but those of banks' as well.

Since the PPP model has seen little success, the Government expects public expenditure to lay the foundation of infra growth. As reported in an article in Moneylife, it is now pushing for a higher public investment. While the intentions seem noble, considering the fiscal squeeze, the Government has limited means to achieve this. In order to be at the driving seat of this investment, it may go for huge debt. As per the recent official estimates, the fiscal deficit for the first eight months (April 14- November 14) has already reached 99% of the target set for FY15. If the Government does act on this plan, India's fiscal health may take a severe blow even as the recovery remains on a very slippery ground.

Also, huge debt by the Government may lead to an upward pressure on interest rates,something that is being seen as a huge road block in the way of economic growth. Last but not the least; public projects hardly have any reputation of meeting deadlines and quality standards. Hence, while the plan does not ensure efficiency and desired outcomes, it is more likely to be negative for the fiscal health. We hope the Government will not be rash with its decisions and will manage to strike the right balance between fiscal health and growth targets.

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