Narayan Ramachandran. Senior Advisor, Morgan Stanley
The finance minister did a remarkable balancing job of a fundamentally imbalanced Budget situation. Indian markets celebrated by going up 2% during the course of the Budget speech. He judiciously gave away candy to some and took away (emergency) candy given to others—all in a pragmatic, avuncular way. Pundits couldn’t quite put a finger on what exactly the market was so taken up with.
My take is that for the first time in many years it was a simple, pragmatic Budget that benefited, as the movie title goes, from “Luck by Chance”. In many ways, this was the first Budget of the re-elected United Progressive Alliance. The two prior budgets were heavily spending-oriented, the 2008-09 one since it was immediately prior to the elections and the 2009-10 one because it was a crisis budget. Because those budgets focused so much on spending, this one could afford to more or less hold the line on spending while using the power of a double-digit growth rate to bring down the fiscal deficit.
From the point of view of capital markets, there was enough to like in this Budget. It addressed fiscal consolidation, not just for the next year, but in a pro forma way for two years ahead. Even though the thinking is almost entirely borrowed from the just released 13th Finance Commission report, it was still a good way to demonstrate a focus on fiscal responsibility.
The sequential reduction of the fiscal deficit, from 6.8% of the gross domestic product this year to 5.5% next and 4.8% and 4.1% subsequently, assuaged some market worries. The finance minister also explicitly said that he would limit “below-the-line items” in calculation of the deficit. This is welcome transparency. By putting out a Rs3.45 trillion estimate on net government borrowings in 2010-11, he put paid to some of the bond vigilantes’ dire predictions. Because of an actual divestment of Rs25,000 crore from public sector enterprises in 2009-10, the promise to do that and more in 2010-11 was greeted with some credibility.
The simplification of personal income-tax slabs does not directly affect the market, but the direction it suggests for the new direct tax code is promising. Holding the service tax rate to coincide with a future goods and services tax (GST) rate showed a streak of maturity and farsightedness not often seen in our annual budget exercises. In a surprise comment, he indicated that the Reserve Bank of India was looking into granting more bank licences, particularly for those that were already non-banking finance companies. He reversed the emergency excise duty concessions to the auto industry and raised the Central excise duty on diesel and petrol, with the argument of normalization. All are positives.
The rhetoric too was quite positive. This will go down as the Budget with the most reference to clean technology, solar power, wind energy, inclusion, importance of technology, hike in research and development exemptions, and such. He announced a Union government match of Rs1,000 per person for those enrolled in the National Social Security Fund. Only time will tell whether these have actual bite, but good words indeed.
There was enough to quibble about as well. The minimum alternate tax was raised from 15% to 18%, making for an 80% increase from two years ago. This will primarily affect large companies with big-ticket capital spending. The launch dates of both GST and the new direct tax code were pushed back to April 2011. No big-bang reform was announced and the detailed mechanism of converting some dole-outs such as the National Rural Employment Guarantee Scheme from mere spending to productivity-oriented programmes was blithely ignored.
Still, after many years of “nothing” budgets, we finally have a practical, workable Budget. Good day at the office, Pranabda.
These are the author’s personal views. Comment at theirview@livemint.com