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Sectoral impact: Who’s smiling and who’s not

Sectoral impact: Who’s smiling and who’s not
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First Published: Sat, Feb 27 2010. 12 46 AM IST

 Mukesh Agarwal, Director, Crisil Research.
Mukesh Agarwal, Director, Crisil Research.
Updated: Sat, Feb 27 2010. 12 46 AM IST
The Budget has stuck to expected lines in announcing a road map for fiscal consolidation while the focus of expenditure remains on promoting inclusive growth and infrastructure development. Here’s a view of what different Budget proposals would mean to different sectors of the economy
Mukesh Agarwal, Director, Crisil Research.
Managing growth along with fiscal prudence
The finance minister has done a fine balancing act in the Budget. While the process of fiscal prudence has been initiated by targeting a lower fiscal deficit of 5.5% of the gross domestic product (GDP) for 2010-11, the minister has attempted to maintain the growth momentum by calibrating the increase in indirect taxes and providing more purchasing power to the middle class.
The intention laid down to move towards the goods and services tax regime and implement the direct taxes code by April 2011 as well as the fiscal policy strategy statement clearly outlines the direction of future policy.
On the flip side, no bold expenditure reforms that would have brought lasting fiscal gains have been initiated. More measures could have been taken to strengthen the spending discipline of the government even though the budgeted revenue expenditure growth is moderate at 5.8%.
The fiscal deficit correction therefore hinges on revenue buoyancy emanating from an improving growth outlook as well as cumulative inflow of Rs75,000 crore targeted from the divestment of stake in public sector undertakings and 3G spectrum auctions. The increase in duties on petrol and diesel could lead to greater inflationary pressure.
Even as excise duties have been increased by 2%, the Budget attempts to stimulate consumption by offering tax concessions to the middle class that are expected to benefit 60% of taxpayers. For example, the effective benefit for individuals with a taxable income higher than Rs5 lakh per annum would be between Rs21,000-Rs52,000 per annum.
The deduction of Rs20,000 per annum from salary allowed for investment in long-term infrastructure bonds is also a step in the right direction, given the huge funds required by the sector. In addition, this would induce individual savings.
Indian industry would be relieved that the indirect tax cuts announced over the course of the past one year have only been partially rolled back. Most industries are likely to pass on the increase in excise duty to consumers given the momentum in the economy.
Gautam Thapar would increase employment. What would you do if you were FM. Play the game, read the analysis. All on Livemint.com’s Budget 2010 microsite .
The reduction in surcharge on corporate tax from 10% to 7.5% would have come as a pleasant surprise. The increase in the minimum alternate tax rate from 15% to 18% would however negatively impact some companies in the telecom services, information technology/information technology enabled services, pharmaceutical and construction sectors.
The settlement of Pay Commission arrears and reduction in fertilizer subsidies has allowed the government the leeway to budget much lower borrowings in 2010-11. The targeted 15% reduction in market borrowing to Rs3,450 billion would ensure that interest rates do not increase sharply, at a time when private corporate sector investment is projected to increase and inflationary pressures would continue to exist.
In sum, the Budget has something for everybody. The finance minister has done a good job in presenting a Budget focused on managing growth while not losing sight of fiscal prudence. The renewed focus on fiscal prudence, as evident in the targeted fiscal deficit of 4.1% by 2012-13, bodes well for the future. One only hopes now that execution matches pronouncements and these good intentions are paved with substantive action.
Crisil, leading Indian rating agency, majority owned by S&P, partnered with Mint to analyse the impact of the budget on industry.
Anjan Ghosh, Head, Corporate Sector Ratings, ICRA.
Outlining a road map for fiscal consolidation
The Union Budget for 2010-11 was widely expected to signal a return to fiscal consolidation and movement towards much awaited structural reforms in areas such as implementation of a goods and services tax (GST), direct tax code (DTC), and subsidies. The Budget clearly stuck to the expected lines in announcing a road map for fiscal consolidation, including an explicit statement on reduction of government debt, timelines for implementation of DTC and GST, and partial rollback of excise duty cuts. The cut in direct tax rates, which was somewhat unexpected, would have a beneficial impact in terms of boosting private consumption and overall sentiments, although it is somewhat difficult to explain in the context of the impending introduction of the DTC.
Among the other positives are the government’s statements on the need to strengthen and institutionalize a mechanism for maintaining financial stability, set up a commission to clean up financial sector laws, take steps to simplify the foreign direct investment (FDI) regime, and focus on clean energy. The emphasis on increasing transparency—whether with respect to avoiding below-the-line items in the Budget such as oil or fertilizer bonds, or with respect to use of technology for tax administration, financial governance, and directed subsidy payments—appears to be another philosophy underlying the Budget.
The focus of expenditure remains on promoting inclusive growth and infrastructure development, with 46% of the Plan allocation being devoted to infrastructure. The growth in revenue expenditure has been budgeted at 6% for 2009-10. The higher target of Rs40,000 crore set for disinvestment proceeds creates fiscal space for the budgeted 30% growth in capital expenditure which, among other things, would allow a substantial increase in the expenditure on roads, recapitalization of public sector banks to the extent of Rs15,000 crore, and a considerable increase in the defence outlay. Additionally, non-budgetary support through India Infrastructure Finance Co. Ltd is expected to increase significantly in 2010-11, facilitating greater private participation in infrastructure projects The proposal to set up a coal regulatory authority and introduce competitive bidding for the allocation of coal blocks is another welcome step—one due for a long time.
The Union Budget for 2010-11 has retained the previous year’s rolling target of 5.5% of gross domestic product (GDP) for the fiscal deficit in 2010-11. The forecast improvement in the fiscal deficit in 2010-11, compared with the revised estimate of 6.7% of GDP in 2009-10, relies largely on the expectation that the revenue deficit would decline from 5.3% of GDP in 2009-10 to 4% in 2010-11. However, the revenue deficit target set for 2010-11 is substantially higher than the previous fiscal’s rolling target of 3%.
The corporate sector as a whole is expected to benefit from the buoyancy in the overall growth, and from the possibility of interest rates remaining under control, given that the borrowing programme is in line with market expectations. The negatives, apart from the increase in the minimum alternate tax rate, would be continued ambivalence on the vexed issue of oil price decontrol. Overall, of key importance would be the government’s ability to ensure that the overall expenditure growth is maintained within the budgeted levels of less than 9% relative to the revised estimates for 2009-10, without which the targeted fiscal consolidation would be difficult to achieve.
Icra Ltd, leading indian rating agency and an affiliate/associate of Moody’s Investor Services, partnered with Mint to analyse the impact of the Budget on industry.
Also See What different Budget proposals would mean to different sectors of the economy
Illustrations by Shyamal Banerjee, graphics by Paras Jain.
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First Published: Sat, Feb 27 2010. 12 46 AM IST