Stimulus may widen Fiscal deficit

The government has announced a slew of so-called stimulus measures to stimulate growth in the country.

All these measures have cost the exchequer to the tune of 70,000 crores.

This will widen the fiscal deficit for the next year. Fiscal deficit is the difference between the revenue earned by the government and its expenditure.

In lay man terms, the government is going to spend much than what it earns. Common sense tells us that if one's spending increases but earning declines then one is headed for financial disaster.

The government target for fiscal deficit is 3 pc. For this year, it has shot to 6 pc and with these cuts it will balloon to closer to 10 pc.

The farm subsidies, oil bonds all add up. Now, if crude shoots up as it should, then the real fun will start.

What this means that sovereign rating (The ability to repay debt as judged by the ratings agencies) will be lowered.

This in turn will make it difficult for Indian companies to raise debt abroad as they will have to pay a risk premium. Also, this will lead to lower FII/FDI inflows.

This is the very same reason personal loans are expensive than housing loans to give you an analogy. The risk of default is more in personal loans as there is no collateral

Cutting of Service Tax is like 2 wrongs are equal to a Right. Service Tax is wrong n the first place because both the provider and utilizer of the Service are already taxed. This is an additional burden.

The excise cuts may not really stimulate much demand. People are not spending not because the cost is too high, but because there is no demand. People will not take housing loans because the rates have lowered by 2-3 pc but because there is uncertainty of jobs and other factors.

Fiscal stimulus is not bad per se, but the deficit should also be kept in mind.

This tax should never have been there in the first place. Now cutting it, they are trying to reduce the burden on the common man. A burden which should not be there in the first place.

FIIs have been heavy sellers for the month of Feb, which has accelerated in the past few days. they are offloading almost 400 crores of stock everyday. DII have been heavy buyers, buying huge quantities.

I suspect LIC is buying to hold up the markets by holding the indices. The broader market is simply collapsing. Just check out the new 52 week lows made today.

The market is above Oct lows simply because of Reliance. Reliance had hit lows of 930 in Oct is now at 1266. Almost 33 pc up. By pumping up few index stocks, an appearance of all is well can be given.

Markets is just waiting for a trigger to go down and the dam will burst.


by Nishit

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