WF: Can you just give us your initial take on the budget?

Vetri: I think the main thing we were looking for from this budget was a return to better fiscal health by cutting the fiscal deficit. I think purely looking at the headline numbers and the statements they have made, clearly there seems to be a returning to fiscal health and cutting fiscal deficit to 5.5% and then to 4.8% and then to 4.1% over the next 3 years. It is good to see that they have those sort of targets. Again I am saying this based on the headline numbers - we have see how realistic their estimates are on the expenditure and as well as on the revenue side. Prima facie the numbers seems to be showing the right direction. The size of the governments borrowing program seems to be reasonable - it is not coming down too much compared to last year. That was expected - if it had gone up, it would have been a negative but it is sort of controlled. At least incrementally it is definitely positive and that is key - I mean we can't afford any more deterioration of the fiscal deficit. You have got a 8% government bond yield and that has caused cost of capital to go up for everybody. Because of the Government's fiscal stimulus you had strong consumption growth in the last year, but last year's growth also indicated investments were very weak. And if you need investments to pick up, you need the cost of capital to come down and it becomes prohibitive when the Government cost of borrowing itself is 8%.

WF: Two key assumptions in these estimates are the 40,000 crores of disinvestment proceeds and the 35,000 crores from sale of 3G spectrum licenses. How realistic or otherwise do you think these two numbers are?

Vetri: I think there seems to be quiet a few numbers that move around. As regards the 3G, the key is to ensure that they put in all the procedures in place to ensure that the auction goes through. It's the implementation that is the bigger challenge - not the number. The number can come in anywhere between 25,000 crores to 35,000 crores - the main thing is to ensure that it goes through.

The disinvestments target is achievable. We have done decently well already in the last few months but I think they need to try and make sure that they intensify more local and retail participation. They really want to do this on a continuing basis - so I think that they need to have more focus in terms of implementation. I don't think the number is unachievable.

A couple of numbers mentioned in the Budget speech bear closer understanding. One, the FM categorically said that all subsidies for oil companies will be paid as cash - and not as oil bonds. Either this means that they accept the Kirit Parikh committee in total - which means there is very limited requirements for subsidy. Or else there could still be a hole of 30,000 - 40,000 crores for oil marketing companies - which has to be filled somehow. There doesn't seem to be any budgeting for that.

Secondly I think from the initial numbers we are seeing a nominal growth in defense spending - on the back of a weak spend last year. With all that's happening around us, we might just see this number being overshot - and that can upset the calculations.

WF: Do you see the diesel price hike and excise duty hikes across the board fuelling inflationary fears that are already high due to food prices?

Vetri: Clearly the food price increase is hurting the large cross section of people. Given that for this cross section of people, food is largest chunk of what they spendi on, there is clearly a wage pressure coming through from them. Therefore any food price inflation will eventually start creating wage pressures from down under. That is something that is there - with or without this budget.

As far as this budget is concerned, obviously they will have to roll back the excise duty reductions that had given earlier. This needs to be done, even if it appears inflationary because I think the more important thing is to bring the deficit under control.

WF: One market expert made a comment that the reduction from 6.8% to 5.5% and then onwards progressively to 4.1% is largely due to the fact that as GDP grows, the denominator keeps expanding rapidly in nominal terms. If you are able to keep the absolute deficit number the same, in percentage terms, it keeps coming down each year. So, the big thing to look at is whether growth is on track - if it is, deficit will get controlled. Do you share this view?

Vetri: Absolutely - that is the bottom line. I mean people are so worried about the economies of Greece and Spain - one of the key reasons is that in those countries GDP declined and deficits are high. So the percentage escalates rather than coming down.

For us the advantage for many years has been that our nominal rate of growth is well above the nominal rate of government borrowing. If you hold the deficit constant and you can keep growing, then eventually you will work off your base rather than directly on the deficit itself.

WF: Its interesting you mention Greece and Spain. Some market experts are cautioning us that while the Indian story is getting better by the day, our stock markets could be held to ransom by international trends - which seem to be getting weaker - especially as growth begins to sputter and sovereign risk issues get highlighted. How realistic are these concerns?

Vetri: Yes it is definitely a cause of concern. Correlations are so high between the markets and between the way the currencies and commodities move - and this is a factor we have been consistently highlighting as a key issue for several months now. These strong global correlations produce some strange and very interesting movements.

It is interesting that in the last six months the Sensex has done worst in the Asian zone. The other market that has done badly in the Asian zone is the Chinese market. Both markets have underperformed to US market - where growth is supposed to be spluttering. Two supposedly fastest growing countries in the world - it seems have been the worst places to invest in the last six months.

Then again, these two countries are supposed to be in the biggest domestic consumptions stories in the world. And yet the best performing sectors in the last six months at least in India have been IT and materials which are more global linked than locally dependent!