The new government’s first Budget seems to have focused on soothing short-term pain and generating some momentum for economic growth in the medium-term.
Wisely or otherwise, but definitely deliberately, the finance minister has left it to the market’s imagination to read between his lines and interpret the government’s intent, direction and pace on the expectation laden areas of disinvestment, de-control and foreign direct investment (FDI).
The Budget offers a slew of broad announcements relating to physical and social infrastructure as well as export-oriented sectors. In keeping with the spirit of inclusion, allocations to many ongoing programmes such as the rural employment guarantee scheme and Bharat Nirman, its flagship plan to build rural infrastructure, have been increased substantially.
Modest beginning: Venkataraman says the impact of the Budget proposals is largely neutral across sectors. Ashesh Shah / Mint
It has maintained its focus on priority sectors with greater flow of farm credit, interest subvention schemes on small ticket farm loans and extension of deadline for agricultural debt waiver by six months.
Although the Budget has steered clear of articulating a clear road map for public sector divestment, attracting FDI in sectors such as banking and insurance, and other policy and tax reform measures, to expect more detail at this juncture may have been more a question of misplaced market expectations rather than a question of lost opportunity.
To be fair, the minister said it in so many words—that one cannot expect a single budget to solve all our problems, nor is the budget the only mechanism to do so.
Nevertheless, a stronger articulation with respect to the policy road map would have served to build a more unified and confident view on the new government’s political will.
On personal taxation, the Budget proposals increasing the personal tax exemption limit and removing the surcharge on income-tax should put more money in the hands of the individual. This is aimed to boost consumption, albeit marginally. The abolition of the fringe benefit tax and commodity transaction tax are welcome steps.
Corporate tax has been left unchanged. While the extension of the 10A/10B sunset clause by another year gives a further breather to information technology (IT) and IT-enabled services companies, this move is neutralized by the move to raise minimum alternate tax rate from 10% to 15%. This, in fact, could have a significant negative impact on IT and telecom sectors.
The impact of the Budget tax proposals is largely neutral across sectors, except for the positives for companies in the business of natural gas production. The plan to implement the goods and services tax by April 2010 as per the original plan is encouraging.
Crisil, leading Indian rating agency, majority owned by S&P, partnered with Mint to analyse the impact of the budget on industry.
In the context of a budget that lays emphasis on expenditure and an impetus for an economic rebound and the muted revenue buoyancy, the fiscal deficit numbers projected for 2009-10 at 6.8% of gross domestic product are within the broad range of Crisil’s expectations.
While there has been a mention of renewed focus on fiscal prudence through a new set of fiscal responsibility and budget management targets, one hopes that these good intentions are backed up with substantive deeds.
In balance, while the Budget marks a modest beginning in terms of persisting with the reform agenda and holds out some unsaid promises, the government has its work cut out to ensure that the momentum is maintained and execution matches pronouncements.
Venkataraman S. is senior director (research), Crisil Ltd.