Budget Special : Countdown begins – ‘Aam Aadmi’ is watching says KR Choksey
When Pranab Mukharjee will rise to present Union budget for year 2009-10 and his 4th budget on 6th July, 2009, all eyes will be watching him closely. This budget gives an opportunity to the UPA government to signals its agenda for the next 5 years. However, budget this time around is also a challenge of balancing expectations of people of India with economic & fiscal rationale. We expect government to remain committed in its inclusive growth agenda and “aam aadmi”. Given the revenue constraint faced by the government and already large concessions given in the three stimulus packages, any significant indirect concessions or another fiscal stimulus package is highly unlikely. We will not be surprised if government withdrawn few of the stimulus to bridge the fiscal deficit.

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.

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