His Budget: The key theme for Budget 2008 is that it aims to put more money in the hands of the Indian consumer. It is a consumption-led Budget rather than an investment-led one. This is done through two entirely different methods for the rural and urban consumer. In the rural sector, it is being done for 40 million farmers in the form of a Rs60,000 crore loan waiver. It is unclear if this will be funded from balance sheets of public sector banks or whether it will come from the government. On average, this works out to a one-time benefit of Rs15,000 for each farmer impacted. Unfortunately, this expediency in an election year exacerbates the moral hazard issue and will impact credit default rates for years to come. For the urban consumer, the same has been achieved by a change in the income-tax slab rates. Families with incomes up to Rs5,00,000 (which is the vast majority) will see their tax burden come down by Rs44,000. This extra income, equivalent to a 10% increase in post-tax income, is a huge amount for somebody earning at that level. Also, there are increased allocations for the social sectors such as education and health, and as well as more investment for rural schemes such as irrigation and water. A lot of this extra funding will also flow to the rural areas.
The third important change is the reduction of the Cenvat rate from 16% to 14%. While not substantial, and assuming it will be passed to consumers, products get a little cheaper. Therefore, there is a clear attempt to put more money into the economy in the form of higher government spend and retail consumption. In turn, this will give an immediate push to economic growth and to the extent that the industries where this demand will be manifest have excess capacity to service that extra demand, it will not be inflationary. The dog that did not bark in this Budget was the infrastructure sector. It got almost no mention.
From a macro standpoint, apart from the waiver of farm loans, by and large there was nothing egregious. The Budget hewed to a fiscally prudent line with the fiscal deficit target down to 2.5% and revenue target to 1%. On the whole, the Budget stayed true to sound economic principles with a shift in focus to consumers and consumption.
Her Budget: The finance minister set out his priorities at the beginning of his Budget speech. These were to control inflation and encourage the growth of agricultural GDP. While the latter appears to have been done by the politically expedient act of waiving of farmers loans worth Rs60,000 crore, it is not immediately clear what he has done to control inflation. In addition, nothing specific appears to have been done to encourage a reduction in interest rates. From a capital markets standpoint, there is not much to cheer about. The increase in short-term capital gains tax is a negative and the markets do not seem to have liked this move. The finance minister also mentioned in passing the listing of unlisted PSUs to improve governance and provide liquidity. This is a positive move, provided it happens.
Other positives are the cuts in income-tax rates, particularly at lower and middle-income levels and the-across-the-board reduction in excise duty by 2%. Additionally, some benefit has been given to consumers in housing loans, making them a little cheaper. It was also good to see that the income slabs for women continue to be higher and, therefore, effective tax rates for working women continue to be lower.
From a market’s perspective, the effort to further institutionalizing the debt markets is good as is the effort to increase the textile fund corpus to help exporters suffering from the rupee appreciation. The finance minister also made a remark about controlling capital inflows on a temporary basis through measures to be decided with the Reserve Bank of India, and on a long-term basis through increasing the absorptive capacity of the economy. However, no specific steps were announced in this regard. In addition, it lacked action on foreign direct investment across any sectors, or any enhanced thrust on infrastructure. The Budget clearly chooses to operate only in areas with direct consumer benefit such as reductions in excise duties for two-wheelers and small cars, as well as items such as breakfast cereals and water purifiers. Benefits to corporations, if any, are by-products of this overarching theme.
Though without overt positives, there are no significant negatives either. The market move on to focus on fundamentals. I believe it will be range-bound for months, with triggers being the political action of state and general elections, rains and global developments. Inflation and interest rates will continue to be important drivers but the economy will hum along.
Sumant Sinha is CEO, Aditya Birla Retail Ltd,?and Vaishali Sinha is executive vice-president, Daiwa SMBC Securities. Respond to this column at email@example.com