A reasonably balanced budget

“This Budget is not transformational but seems to toe a logical line in addressing the country’s needs. The government’s ability to focus on fiscal discipline needs to be watched through the coming election year” — Rajiv Memani

The real signs of a US slowdown, the impact of the subprime crisis, coupled with slower growth in developed Europe and Japan, have rattled sentiments in the global financial markets in the last few months. This has flowed through to the Indian markets with valuations coming off by 20 per cent (approx.) from the peaks seen during the year, and the consequent impact on the plans of Indian companies looking to raise growth.

India’s entrepreneurs continue to be positive on the sustainability of the country’s growth story, though the RBI’s strong focus on inflation control through its monetary and interest rate policy, impact of a strong rupee on the export sector and slowdown in domestic consumption were key concerns. How the FM would address these issues and whether he would be able to give a strong fiscal stimulus to the economy and the impact of pressures of an election year, set the stage of this year’s Budget exercise.

Export-oriented sectors (such as textiles, handicrafts, etc.) were severely impacted by a stronger rupee during the year. Although capital goods registered a high growth, consumer goods and durables growth came off sharply. The government and RBI’s focus on controlling inflation has worked well with current inflation estimated at 4.7 per cent.

The fiscal deficit at 3.1 per cent was well within the stated targets under the FRBM Act. The fiscal position this year has been strongly supported by robust tax collections (tax-to-GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in the current year), which is a positive fallout of high growth (in the last three-to-four years) and better tax compliance (and monitoring by the department through its infotech initiative).

Agricultural growth, at 2.6 per cent, is an area of concern for the government and corporate India alike. The impact of higher rural incomes on the overall economy is well understood. The government has given a strong renewed focus to various schemes that target inclusive growth and development.

Increase in agricultural credit, schemes to promote rural health and employment, and the progress reported to increase connectivity to rural villages via roads and telephones and to electrify and provide drinking water is encouraging.

The FM announced a large debt relief package of Rs 60,000 crore on outstanding farm loans. A step like this in an election year was not completely unexpected and though one empathises strongly with the farming community, the appropriate targeting of this benefit is questionable.

The Budget has taken steps to build on India’s demographic dividend and to renew and increase the focus on healthcare and education. Various steps have also been taken to further government schemes that target women and child development, care for the elderly population, address gender inequalities, and promote vocational and skill training to create a larger pool of employable workforce in the future.

The total allocation for the education sector has been increased by 20 per cent over the previous year to Rs 34,400 crore. Besides increasing allocations around existing schemes for primary and secondary education, the establishment of a Skill Development Mission with an initial government contribution of Rs 1,000 crore to be increased with private and public sector participation to Rs 15,000 crore is a very good initiative to increase the future employability and competitive edge of our workforce.

The health sector allocation has been increased by 15 per cent over the previous year to Rs 16,534 crore. Steps taken to bring down the cost of drugs for the treatment of AIDS, and to give support to the pharmaceutical sector (through reduction in excise duties from 16 to 8 per cent and 125 per cent deduction benefit for outsourced research) are positive. Further, the provision of a five-year tax holiday for setting up hospitals in certain areas other than urban agglomerations should assist the private sector in its mission to create high quality healthcare facilities to service our large population and growing healthcare needs.

This year’s Budget announcements seemed more focussed on the social infrastructure theme and somewhat neglectful of the agenda to aggressively augment other areas of physical infrastructure that are also key to sustainable future growth. The progress on the Golden Quadilateral and NHDP programme and commissioning of 10,000 MW of power in the first year of the 11th Plan period is encouraging.

In addition, the plan to bring five additional ultra mega power plants to the bidding stage, are directionally correct. However, the performance versus plan in other areas of infrastructure development needs to be assessed. The FM’s tax announcements are supportive of the economy’s growth agenda and supportive of the manufacturing sector. The reduction in CENVAT, select excise duties and CST are consistent with the government’s stated tax rationalisation agenda. The step to reduce excise duty on small cars and two- and three-wheelers should encourage people to buy smaller and more fuel-efficient vehicles, which is important in the context of all-time high crude prices. More could have been done for the export sector that is also labour-intensive (perhaps by way of extension in income tax benefits beyond 2009 for exportoriented units).

The above-mentioned tax initiatives to promote consumption and putting more money back in the hands of the consumer, seemed to be high on the agenda, and rightly so. The personal tax proposals result in a tax saving of Rs 45,000 (approx.) for individuals with an income level of Rs 5 lakh per annum—which is significant.

The increases in basic exemption limits to Rs 1,50,000 (higher for women and the elderly) also bring relief to the urban population that has had to deal with a high cost of living. Corporate India did not have high expectations around further reductions in corporate tax rates, etc., and are probably relieved that no additional cess was imposed. Some small measures were taken around FBT, however, everyone would probably have been happier if FBT had been discontinued.

The step for a holding company to get credit for DDT paid by its subsidiary is positive. The modification proposed to the STT and short-term capital gains tax affect are marginal and seem to have been taken by Dalal Street in its stride. The FM’s initiative to expand the market for corporate bonds, currency and derivates and to develop a seamless national market for securities would clearly help the corporate sector in its funding and risk management requirements.

The Finance Minister has to be complimented on a reasonably balanced Budget, in the context of the forthcoming state and general elections, that addressed the need to augment personal incomes, build social infrastructure, and extend support to certain industries without deviating significantly from the government’s stated agendas of promoting economic growth, controlling inflation and tax rationalisation. This Budget is not transformational but seems to toe a logical line in addressing the country’s needs. The government’s ability to focus on fiscal discipline needs to be watched through the coming election year. As always, the Budget’s impact would be dependant upon how actual expenditure ties into the stated allocations and finally the quality of governance in improving the efficacy of the rupee spent in its plans.

Rajiv Memani is CEO & Country Managing Partner of Ernst & Young