This Budget had to be the most challenging one for the finance minister in recent times, given the objective of sustaining high growth in the backdrop of increasing global turbulence, and political compulsions. Most of us had expected a populist Budget. While we can clearly find some such measures, overall the proposals were on expected lines and sought to balance various imperatives. But despite some positive measures on the social infrastructure and farm front, there is no strong policy direction on some critical sectors, especially infrastructure and financial services.
It is heartening to see an increase in proposed outlay for the two pillars of the social infrastructure—education (up 20% to Rs34,400 crore) and health (up 15% to Rs16,500 crore). Especially on the education side, some important initiatives, such as the setting up of 16 Central universities and new Indian Institutes of Technology should go a long way towards increasing the skill levels and employability of our young population. Allocations to all government flagship schemes have been increased, and focus has also been given to creation of rural infrastructure. An important aspect of social sector spending is the efficacy and accountability with which results are delivered by the government and its agencies. Through our history, good proposals have been scuttled by bad implementation, and let’s hope the monitoring mechanism conceptualized in this Budget covers all aspects of our social spending.
Expectedly, big-ticket proposals were lined up for the farm sector since its performance had been relatively lacklustre. The most noticeable item is the planned waiver or restructuring of agri loans, which could potentially amount to Rs 60,000 crore, and it still remains to be seen who will bear the outlay and how it would be funded. The effectiveness of such proposals is debatable, given that there are moral hazard implications (with taxpayers and/or banks bearing the brunt), and questions on whether the benefit would reach its intended recipients. But the long-term solution lies in structural reforms which improve farm productivity and incomes. I hope our targets for increasing farm credit, rural infrastructure and irrigation bring about the desired results.
As I mentioned, apart from some tax and capital market related measures, one could not find substantial policy direction for the manufacturing and infrastructure sectors. The positives are the government’s proposal for five more ultra mega power projects, creation of a fund for T&D (transmission and distribution) reform and continuation of the textile sector schemes. After the recommendations of the Economic Survey, one had also expected policy direction on reforms and liberalization of the financial sector, but the issue seems to have taken the backseat for the time being.
An important announcement was the deepening of our capital markets vide introduction of new derivative instruments with currency and interest rate underlying, stripping of convertible bonds, and developing a uniform stamp duty regime for the securities market. Deepening our debt markets, and the proposals announced in this Budget, are of utmost importance and need to be implemented with speed, not only for domestic businesses but also for monetary policy management. However, the increase in the rate of short-term capital gains has widened the gap between domestic investors and foreign institutional investors, who have structured their investments from friendly jurisdictions.
On the tax front, in view of the recent buoyancy in corporate tax revenues, the finance minister could afford to announce reductions in personal taxes by raising the taxation slabs and also introducing some exemptions/deductions in relation to reverse mortgages and health insurance. There was a case for withdrawal of surcharge, especially on corporation tax, but companies would have to do with one more year before they could look at any changes in their taxation structure. However, a long-standing demand of the industry—rationalization of dividend taxation—has been partially addressed and with this, SPV (special purpose vehicle)-driven sectors such as real estate, infrastructure, etc., would have some more leeway to manage shareholder returns. A lower overall excise duty could be an anti inflationary measure, and there are other proposals as well to address specific industries such as auto, pharma and food processing.
Overall, the government projects a total expenditure of Rs5.075 trillion, with a revenue deficit of 1% and fiscal deficit of 2.5% of GDP in 2008-09: a vast improvement from the past, but indications are the deficit will continue, because of more social spending, for at least a year. Running a deficit could still be helpful for a focused pump priming of some sectors, but much depends now on doing than planning.
Ashok Wadhwa is CEO & partner, Ambit Corporate Finance.
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