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Technology Stocks : Satyam Infoway Ltd-(Nasdaq:SIFY) -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (925)	2/28/2000 12:41:00 PM
From: Mohan Marette	Read Replies (1) \| Respond to of 1471

Budget 2000- It's the Final Countdown 28-02-2000 18:32:45 The annual budget on Tuesday is expected to raise taxes, cut spending and privatize, but the speed at which interest rates come down will be the decisive factor in the battle to control a debilitating fiscal deficit. Finance Minister Yashwant Sinha's priority is controlling the deficit while keeping economic growth on a trajectory that will drag large sections of India's burgeoning population out of poverty and build a better-off middle class. Interest rates are moving south and there is strong speculation that the central Reserve Bank of India (RBI) will cut rates straight after the budget -- just as it did last year, when the RBI cut its bank rate to 8%. There have been no cuts in the intervening 12 months and corporate borrowing rates average more than 12% while wholesale price inflation has fallen below 3% annually. "The most important development in the next few months would be a concerted move towards an interest rate targeting regime," Surjit Bhalla wrote in the latest "Developing Trends" research report from the New Delhi-based Oxus Management Fund. Sinha will apply the usual fiscal prescriptions of broadening the tax base and hacking inefficient subsidies, but he also knows the importance of keeping investors friendly, and while he gets tough on government finances he is unlikely to do anything that will upset India`s booming stock market too much. A revenue deficit fluctuating between 2.4% to 3.8% for the past seven years shows Sinha needs to make some fiscal restructuring, including simplification of a complex tax code. Fast-growing service industries could be hurt and new industries like software could have a tax on exports introduced. The services sector accounts for over 50% of India's GDP but only contributes 1.7% of net tax revenues, according to a study by Credit Rating Information Services of India Ltd. The finance minister may even try tapping India's richer farmers, hitherto a protected species, for tax. The private sector industries that have blossomed in the last decade of liberalization will find themselves paying more to help out a badly lagging public sector. DEBT PAYMENTS EQUAL 7% to 8% OF GDP But debt servicing accounts for around 75% of the consolidated fiscal deficit - that is including the provincial governments' debt and the cost of funding loss making public sector units. Cutting interest rates would have the biggest long-term impact on a consolidated fiscal deficit that is running at close to 10% of GDP. Every one percent off the interest rate can save around Rs20bn ($458.7mn) a year in debt servicing, as the lower interest rate only applies to the flow of fresh debt -- which in FY2000 was around Rs1,800bn, according to the Oxus report. The average maturity of Indian government debt is five to six years and there is a bunching of maturing debt in 2004/2005. If India can lower interest rates further the benefits will show up progressively thereafter. Aside from saving money, the economic rationale for lower rates certainly exists. India's real interest rates, that is the difference between the nominal rate and inflation, are among the highest in the world. The central bank wants to bring rates lower, but as it is also the guardian of the public sector banks which dominate India's financial system it has to think about their health too. Chronic non-performing assets and growing competition for savers' money, plus banks' own inefficiencies, have meant banks have been reluctant to cut their deposit rates. What Sinha says on Tuesday will excite the markets if he mixes more reform with financial prudence. But what the central bank does to lead the banking system toward lower rates will determine the price India pays for its calibrated moves toward liberalization. -Source: Reuters via Probity