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Pre budget debate - big on social welfare and low on corporate reform? |
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The budget is round the corner and is being eagerly awaited for it will indicate the direction in which the country will be heading at least for the next one year. There are hopes from the new government that is free from the shackles of the Left.
According to analysts there would be many overarching themes in the Budget of 2009–10. Social sector spending is important to demonstrate the commitment of the government towards the people. Large allocations will be made for social sector welfare schemes such as education for all, midday meals, secondary education, health sector spending, National Rural Employment Guarantee Act, Rajiv Gandhi Drinking Water Mission and women specific programmes. Of equal importance will be infrastructure development with higher infrastructure fund allocation for the Bharat Nirman (Development of India) programme, roads and power sector development.
Correcting the fiscal imbalance: One of the key issues is keeping fiscal deficit within reasonable limits. There are two diametrically opposing views. Planning Commission Deputy Chairman Montek Singh Ahluwalia is in favour of pushing for growth now and worrying about the deficit later, given that there is no immediate risk of general inflation, and since there is still some evidence of a shortage of private demand. But the Reserve Bank governor, D Subbarao, has been sending out different signals, arguing apparently that the time may have come to start tightening up on money supply and let interest rates rise.
Industry is also divided. They would like the lower excise and service tax rates introduced at the height of the economic crisis last year to continue, but realise that if this means a bigger government borrowing programme, then interest rates that are already too high might climb still higher, and result in a counter-cyclical squeezing of economic activity that no one wants.
The view of economist is balancing public expense and fiscal prudence. According to them, the thrust on higher spending, which is essential to partly counter the impact of the global meltdown, would need to be balanced by efforts at fiscal prudence through policy measures. For example, dilution of 10% stake in the top 10 PSUs by market cap can garner Rs 370 billion for the government. Rising crude prices make deregulation unlikely, but the government could consider a hike in auto fuel prices. In order to bring long-term foreign capital into the country and improve forex reserves, the 49% FDI cap in insurance may be hiked from 26%. ECB norms too could be relaxed. For corporate India, FBT (Fringe Benefit Tax) needs to be done away with, especially for exporters of gems & jewellery and textiles.
In the Interim Budget presented to Parliament earlier this year, the finance minister had posited 7 per cent GDP growth and a fiscal deficit of 5.5 per cent. The true deficit, including the oil deficit at current prices, would be about 6.3 per cent, which compares with 7.8 per cent last year.
The problem with a “popular” budget is that the government wishes to spend more on socio-economic programmes as well as on infrastructure investment. And if oil prices go up, the deficit would head back to last year’s level of 7.8 per cent, which must be considered unacceptable.
There is a positive side also. The government is likely to earn up to Rs 25,000 crore from 3G licence auctions, and perhaps as much or more from a disinvestment programme. This could bring the deficit back to the region of 6.3-6.5 per cent of GDP. Economists feel “ideally, a 6 per cent limit is what the government should aim at, for that would present RBI with a borrowing programme that it could manage in the market without sending interest rates skyward”.
Budget could be disappointing for the market: The forthcoming budget on 6 July remains could play a key role in dictating market direction. Amitabh Chakraborty, President – Equity, Religare Capital Markets writing in the Economic Times says “though the market has consolidated at higher levels, we see a risk of disappointment from the budget, as we believe the theme will be big on social welfare and low on corporate reform”.
An analysis of pre-and post-budget market movement suggests that over the past 18 years, the market has corrected 14 times post-budget. Excluding the outlier of 1992, the average fall is 4.3%. This time as well, given the higher expectations and strong rally subsequent to the election results, a post-budget correction appears likely.
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