Budget 2012: Gold import curbs to buoy rupee

in 2012 so far, there has been an improvement in foreign portfolio capital inflows which has been crucial in stabilising the rupee, after sharp depreciation since September 2011. Sustenance of these flows and, therefore, continued support for the rupee is dependent on government’s efforts to revive growth and control inflation in the coming fiscal year. In that context, fiscal consolidation was crucial as fiscal slippage with rising subsidies in the current fiscal year stoked inflation and deterred the RBI from cutting rates.

Against this backdrop, market participants were looking for the finance minister to deliver “credible” fiscal consolidation while supporting growth by reviving investment activity and addressing supply side deficits in the infrastructure and farm sectors. The Budget delivers on reasonable fiscal consolidation with an eye on supporting growth. The fiscal deficit target for next fiscal has been pegged at 5.1% of GDP down from 5.9% in the current fiscal.

Moreover, fiscal consolidation is based on a lower subsides bill, higher indirect tax revenues while maintaining overall spending growth in line with nominal GDP growth.

In order to channelise household savings into productive asset creation, the finance minister (FM) provided a tax incentive to individuals to invest in equities and penalised gold imports by increasing customs duty on certain categories. Higher import duty on gold products would be positive for the rupee, as during the current fiscal year gold imports crossed $50 billion, thereby adding to the pressure on the rupee from a growing oil imports bill. The size of net market borrowings is budgeted to go up to Rs4.79 lakh crore from Rs4.36 lakh crore in the current fiscal year.

That is bound to put upward pressure on interest rates in the economy.

The FM delivered partially on improving the supply side. The focus here was on the infrastructure sector, particularly power, where access to foreign capital via external commercial borrowings (ECBs) was eased and some tax concessions were given.

On the whole, Budget 2012 with a focus on fiscal consolidation, may provide some support to the rupee ($-Rs rate: 50.19), which otherwise is under pressure again from a strengthening dollar and rising oil prices.

Gaurav Kapur Senior economist, Royal Bank of Scotland N.V.