Budget 2009-10: Growth scores over Fiscal Discipline
By
Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance Co. Ltd.
The new government’s first budget ensured growth at the cost of delayed fiscal consolidation. The government has taken some steps towards fiscal reforms by eliminating some irritant taxes (FBT, CTT) benefiting the industry, a clear roadmap for the roll out of GST, broadening the service tax area however increase in MAT to 15% was bit unexpected negative for the corporate sector. Capital markets which had run-up to the budget had huge expectations on disinvestment front and FDI investment reforms was disappointed and negatively reacted in the short term. Once the fine print is read and understood by the street, the market would focus on the long-term impact of the same and recover going forward. There was clearly huge headroom to increase consumption at bottom of pyramid and the minister has precisely focused to address the same.
Budget reminded financial markets once again that focus of the government will be on “Aam Adami” and on right execution of expenditure on Education, Healthcare and Infrastructure, so that every single citizen of India will ripe out the demographic dividend otherwise income disparity and gap between poor and rich will become wider.
Role out of GST by 1st April,2010 was a positive surprise for the market. No role back of the stimulus package or maintaining the service tax rate was a step in the right direction. Also number of steps like removal of surcharge on tax & FBT, increase in exemption limits etc. were steps to empower tax payers. Removal of surcharge alone will add around Rs.30 billion extra income in the hands of the consumers. Budget has not only provided extra income in the hands of consumers but also provided avenues where individuals can channelize their extra income. The average public ownership in Indian listed companies is 7.8% (Mar’09) and government proposes to raise, in a phased manner.
However the budget was short of expectation on disinvestment, decontrol and deregulation, which was the focus area of economic survey. The laxity on the fiscal deficit was also a disappointment. A higher than expected fiscal deficit also impacts investment cycle recovery.
Similar to the railway budget and economic survey, this budget has clearly spelt out the long-term target for the economy. Government plans to sustain growth rate of at least 9% per annum over an extended period of time. Also it wants to increase the investment in infrastructure to more than 9% of GDP by 2014 from current 4.5% and maintain agriculture growth rate of 4%. The setting up of the Unique Identification Authority of India (UIDAI) along with strong executor is a major step in improving governance with regard to delivery of public services
In my view the finance minister has opted for growth over fiscal discipline to achieve long-term growth oriented economic benefits.
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