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`Chai' with masala

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The biggest challenges facing us over the next year will be flow of credit to support growth, and infrastructure creation.

Amit Chandra

The Budget is now a statement of the state of the Government's finances and its intentions for social spending and on both parameters, this is a very positive Budget from Mr P. Chidambaram.

From inflation to deficit ratios, from productive spending on plan expenditure to GDP growth, from tax as a per cent of GDP to savings rate, virtually all key macro economic parameters are steadily moving in the right direction. Yes, there are pocket of concerns, but then we Indians only love our chai with Masala! In the bigger scheme of things, we must focus on getting most of the things right and carry the burden of our politics and social diversity, which many times is also our strength.

Markets were bang on this time with expectations nothing big was expected and therefore we witnessed a minor relief rally that nothing adverse was introduced. More importantly, from a long-term perspective, with a stable tax regime, better compliance, and a favourable macro economic environment, rises the likelihood of GDP growth forecasts being raised beyond 8per cent. So where are the red flags? In my opinion, the biggest challenges facing us over the next year will be flow of credit to support growth, and infrastructure creation. We seem to be heading towards a clear mismatch between deposit creation and credit growth and even if the RBI were to relax SLR\CRR requirements in due course, we might still fall short leading to a significant squeeze in credit and spike in rates.

To possibly address such a situation, the Finance Minister has signalled willingness to raise FII investment in Indian debt. Infrastructure, especially power sector, needs a much bigger thrust than the few measures outlined in the Budget one of which, withdrawal of 10-23(G), is a clear negative.

(The author is Joint Managing Director, DSP Merrill Lynch Ltd.)

(This article was published in the Business Line print edition dated March 1, 2006)
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