Budget is likely to be focus on the agriculture, infrastructure, job-intensive industries and SMEs. On the reform side we expect road map on the disinvestment & GST to be presented. FDI limits in Insurance, Airlines & defense to be increase with simplified norms in calculating FDI limit. Apart from the budget announcement, execution of the reform is another matter and historically we had below-average track record of executing reforms.
Key focus area to achieve long term economic growth
Supporting long term economic growth of 8-9% is very much focus of the new
government and the key actionable items to achieve are: 1) Increase public &
private investment in infrastructure to boost the economy reeling under the
impact of the global financial meltdown 2) Announcement of new large size
projects in Port, Road & urban infrastructure 3) Long-term agriculture policy
to promote second green revolutions, expanding irrigation channels, development
of supply chains to connect farmers to consumers and processing industry which
Improve the agriculture productivity & rural income 4) Initiatives to improve
skill levels & human resources 4) Improve governance.
“Aam Aadmi” is on the top priority
In UPA manifesto and post election, government has emphasized its focus on the
inclusive growth and ‘aam aadmi’. Huge job losses in export oriented
sectors and weak job scenario has led many politicians to support labour driven
industries. Government to expand its populist scheme NREGS to urban area and
will also increase the allocation to Sarva Siksha Abhiyan, NRHM and Bharat
Nirman.
Government will widen the food subsidy to the Below Poverty Line (BPL) family
by providing food grains of 25kg/family/month at Rs3/kg. Government may
consider increasing tax slabs & exemption limit on individual income.
Economic Reforms will be accelerated but not in full gear
Roadmap on disinvestment through public offering will be announced as a revenue
raising measure. Deregulation on fuel prices will be the complex and political
issue as international crude is above $70/bbl level. Goods & Services Tax (GST)
is most important reform in indirect taxation and government to present its
blueprint in the budget. Increase FDI limits in few sector is on the card since
UPA government’s budget in 2004-05. Given the lower commodity prices,
subsidy bill will be lower compared to the previous year. Political will be
required to improve the targeting of government subsidy by providing it
directly in the recipients in form of cash/voucher rather than indirectly
through prices. Given the lack of political will, any significant labour
reforms are not expected. The government will not announce outright sale or
management transfer of PSU companies due to political opposition both within
and outside the UPA. Any changes to land acquisition laws are not expected as
there was significant public opposition to SEZ land acquisitions.
Containing fiscal deficit will be the challenge
The President’s speech makes it clear that the government plans to focus
on ‘inclusive growth’ and rural India. Given the significantly higher
plan allocation and lower than budgeted revenue collection, budget deficit is
expected to increase. The government may announce a roadmap to reduce fiscal
deficit through a new FRBM Act. Government will announce revenue raising
measures such as disinvestments and 3G auction sales. Oil and fertilizer
subsidies were given through bonds which were not reflected on the
government’s budget. In keeping with sound budgeting policies, the
government many announce a plan to provide all future oil and fertilizer
subsidies through the budget rather than through off budget bonds.
Corporate wish list!!!
There are not many realistic expectations of significant reduction in both
direct and indirect taxes. However, India Inc will expect government to remove
Fringe Benefit Tax (FBT) which has added tax burden and paper work.
Re-introduction of investment allowances is also a demand for few sections of
the corporate. Companies would like to see retention of the cuts in indirect
taxes that were part of the stimulus packages. Long pending demand from the
capital market is removal of Securities Transaction Tax (STT) & Commodity
Transaction Tax (CTT) and reduction in dividend distribution tax from current
15%. Metal companies want an imposition of safe guard duty on steel & aluminum
products. IT companies are lobbying to extend STPI benefits beyond
March’2010. Oil & gas companies expect de-regulation of fuel prices and
inclusion of tax holiday for natural gas production. Telecom players demand
faster 3G auction and implementation of uniform licence fee. Infrastructure
sector expect annuity based road projects compared to BOT projects. In the
banking sector, banks expect increase in subvention on farm credit from 2% to
3% and consolidation of PSU banks.
Market Performance Pre-Post Budget
Historically market built expectation on budget and has little run up before
the budget (Exhibit 11). Out of the last 18 budgets we have taken, in 12 cases
we had given negative return for 30 days post budget as most of the
announcement already factored in pre-budget run up. We had seen one of the
fastest and sharpest rally since March’09, we don’t expect market
run up post budget unless significant reforms announced.
User