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'Modi govt will have to prove its mettle in 1st Budget'

May 29, 2014 18:29 IST

Prime Minister Narendra Modi government's first budget in July will give early economic trends for investors, especially issues related to power for the states, land laws and taxes, a senior executive of Morgan Stanley Investment Management (MSIM) said on Thursday.  

"Everyone has projected their own hopes over the new government... (but) we will still have to wait till July (for) the first hint in the budget," said Ruchir Sharma, Head of Emerging Markets and Global Macro at MSIM.     

The key things in the budget would be to see how much power is given to the states and the management of the land issues among others, he told reporters at the MSIM's annual Ideas Conference being held on May 29-30.           

"A lot of power really needs to be given out to states to try to figure out what is the best way to do this, " said Sharma.  

On the investment side, people would want to see how efforts would be made to "unlock all these stalled projects" that were held up by land issues, he said.  

The Modi government's approach to Goods and Services Tax would be another major indicator, said Sharma.  

"These are some of the benchmarks to look at," he added.    

He also called for a more independent central bank. The new government should back the Reserve Bank of India, said Sharma, noting that former finance minister's working relationship with RBI was quite counter-productive.  

Sharma also sees inflation in India at double-digit for the coming years because wages would have to be increased in line with productivity.           

He noted that the Rupee has firmed recently but cautioned that the currency should not lose its competitiveness in global trade.  

If the government takes up reforms in the Budget then inflows will again pick up,” said Mohan Shenoi, president - group treasury and global markets, Kotak Mahindra Bank.  

But a few experts believe if inflows continues to be high, the pace of RBI in mopping up dollars may remain the same.  

“The pace of RBI's intervention and mopping up (of) dollars will depend upon the amount of flows likely to come in. If inflows increase, then my sense is that they may continue to mop up dollars. Similarly, if inflows decrease then probably RBI may reduce their interventions.

RBI will also calibrate their interventions, keeping in mind the total amount of their forward obligations,” said Saugata Bhattacharya, chief economist, Axis Bank.  

Latest data show RBI's foreign exchange reserves rose by $ 1.09 billion for the week ending May 16 to $ 314.93 billion. The reserves are consistently rising week after week.

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