The forthcoming Union Budget is keenly awaited by the common man as well as market participants. The major issue before the Government is the rising food prices and the continuance of economic stimulus packages which were introduced during the downturn of the economy in the backdrop of global recession.
Even though the Reserve Bank of India (RBI) and the Prime Minister's Economic Advisory Council (PMEAC) prefer a roll back of stimulus packages, market participants are vary in their opinion. The PMEAC's Chairman C. Rangarajan proposed a partial roll-back of stimulus measures as the expenditure stimulus was directed at augmenting consumption and not investment. As part of the stimulus packages to industry, the government had cut down the excise duty drastically from 14 per cent to 8 per cent and service tax from 12 per cent to 10 per cent, among other measures.
The ‘Review of the Economy 2009-10' released by the PMEAC projected a gross domestic product (GDP) growth of over 7.2 per cent this fiscal, 8.2 per cent in 2010-11 and 9 per cent in 2011-12.
“A lower deficit is desirable as it frees up resources for more productive use, decreases inflationary and interest rate pressure. But abruptly exiting from the stimulus is risky, since it can dent the consumer and business optimism that is visible and rising. Hence, a middle option is to raise excise and service taxes in smaller doses; say 2 per cent now and the rest one year later,” said Ajit Ranade, Chief Economist, Aditya Birla Group.
“The biggest takeaway that most investors are looking at from the budget is the roll back measures as far as the fiscal stimulus is concerned, the mode and speed of withdrawal as well as the fiscal deficit projections that the finance minister provides,” said Sandip Sabharwal, CEO-Portfolio Management Services, Prabhudas Lilladher, a leading securities broking firm.
The food inflation, hovering around 18 per cent, could affect the demand in other sectors also. “Inflation management is not merely a monetary issue, but also a fiscal issue,” said Mr. Ranade. Industrial growth is strong and broad-based, but will be unable to depend on export demand. So, domestic spending is crucial for sustained recovery and growth. Consumer spending on non-discretionary items can be affected if food related inflation continues to rise. “In that sense, high inflation can seriously and adversely affect growth.”
“I believe that, Budget 2010-11 will strive to achieve a balance between sustenance of growth, paring deficit and controlling inflation, at least the inflationary expectations,” said S. A. Narayan, Managing Director, Kotak Securities. The previous budget in July 2009 was focussed more on sustaining and improving growth rates as compared to fiscal discipline. Inflation was not a concern, then. “A partial roll-back of fiscal stimulus measures is expected with a view to reducing fiscal deficit.” However, Mr. Narayan said that significant changes in duties and taxes may not happen in the forthcoming budget pending likely introduction of Goods and Services Tax (GST) and Direct Taxes Code with effect from 2011-12. The then Union Finance Minister P. Chidambaram had committed to the implementation of the GST regime by April 1, 2010, in Parliament in 2007. However, the present incumbent Pranab Mukherjee had already acknowledged the delay. With curbing food inflation becoming the prime concern of the Union Government, the need for a transparent and simplified tax system like GST — to avoid the cascading effect of multiple taxation — has become imperative. The GST was proposed to replace central excise duty (Cenvat), service tax, and additional duties of customs at the Central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, State surcharges related to supply of goods and services and purchase tax at the State level. Some clarity on GST and the Direct Taxes Code is needed as both of them are significant tax reforms that are happening in India after a period of nearly 15-20 years.
Over the next one year, given the revival in economic growth, tax revenues are expected to be strong. However, the markets will also be looking at what the government is targeting in terms of revenues from other sources like disinvestments and 3G auction. The markets will also be interested in looking at whether the corporate surcharge will be removed as that will boost corporate profitability.
“Given the large government borrowing programme for the next financial year, fiscal discipline will be of utmost importance and the markets are likely to be pleased if next year's deficit is in the range of 5-5.5 per cent,” said Mr. Sabharwal. However, the PMAEC envisages only a cut of 1-1.5 per cent in the Centre's fiscal deficit in 2010-11 without any adverse impact on economic growth. As reported widely, Dr. Rangarajan also noted that a cut in fiscal deficit during 2011-12 by one per cent by outlay rationalisation and another 50 basis points from the revenue side would be a possibility.
The markets also were concerned about the fact that the budget should focus on investments required for boosting agricultural as well as the entire agri supply chain productivity and should give infrastructure status to such investments.
