Fiscal prudence on the cards in Budget

The Union Budget may signal a partial roll-back of the generous stimulus extended in late 2008. Where would the action be?

Come 26th February and all eyes and ears will be on finance minister Pranab Mukherjee, as he enters into a long monologue on the government’s budgetary plans for the coming year. Very prominent on the agenda is the move towards fiscal consolidation, a subject on the tip of the tongue of every industrialist, banker, analyst, economist and, perhaps now, even the common man.

Debates abound whether the time is right for withdrawing the fiscal stimulus. The business community is against such a move while economists strongly believe the fruit is ripe and needs to be plucked. Both sides of the argument hold merit.

However, the question is not so much whether the government will act on its fiscal position or not. It is more a question of the extent of government action on this front.

Vikram Kotak, chief investment officer, Birla Sun Life Insurance, believes, that “whether the stimulus will be and should be withdrawn is no longer debatable. The question is (of) a clear roadmap on how it will be done. India has already withdrawn 40% of the monetary stimulus. With the economy already on a sustained recovery path, we expect fiscal stimulus to also follow suit, in a gradual and calibrated manner without snapping growth. The government would attempt to finely balance the dual objectives of sustaining growth momentum and addressing fiscal consolidation.”

The government is treading a fine line between growth and inflation, but the scale seems to be tilted more towards the latter. While the government’s fiscal deficit is nowhere near the bloated figures of western countries, it is indeed caught in a tight spot.  

Anand Rathi Research says, “Although fiscal prudence would be the right choice for India, we do not expect any tough measures in the FY11 Budget—either a broad-based tax hike or a major across-the-board cut in expenditure. Yet, the non-recurrence of one-off expenditures as in FY10, strong non-tax revenue growth, partial rollback of tax rate cuts and the change in the composition of GDP is likely to lead to narrowing of the fiscal deficit.”

Vikram Kotak is of the opinion that the government should not miss the opportunity of fiscal consolidation as it did in the growth phase of 2003-2007. “At this juncture, it is pertinent to note that the economy does not require big promises. The need of the hour is the timely execution of the unfinished agendas which has the potential to take India to the next growth trajectory,” he added.

The government had doled out Rs1.80 lakh crore through three stimulus packages to prop up a faltering economy against the recent global downturn. The stimulus was mainly directed towards exports, especially textiles, leather and gems and jewellery; small and medium enterprises (SMEs), infrastructure and housing.

While exports in some of these sectors have witnessed a turnaround, others are still struggling to hold their own. As such, the government may opt for a selective withdrawal of stimulus measures, giving some more space for the laggards to put up a better performance.

Anand Rathi Research believes the focus of the Budget is likely to be on driving broad-based growth, fostering agro productivity, infrastructure development and exports. “Sectors that are likely to benefit include agro products, financials, capital goods, construction, IT services and utilities. Rising tax rates, however, are likely to be negative for the automobile and metal sectors.”

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    Shibaji Dash

    1 decade ago

    FM does not appear to have any alternative to hike direct taxes levies, may be, by inserting one more bracket above 30%

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