Fiscalprudence is expected to be the primary agenda of Budget 2010-11. This iscertainly not the year for industry-specific freebies or any galloping grossbudgetary support. Instead, the Finance Minister will aim at bringing downfiscal deficit, largely through stimulus withdrawals, disinvestments and 3Gauctions, among others. Inflation control measures (mainly food inflation) willalso be a focus area.
Weexpect significant positive measures for the rural economy, in line with thegovernment’s agenda of inclusive growth, infrastructure development andeducational reform. Announcement on disinvestment and GST roadmap will betracked closely. The budget is unlikely to cause any negative impact forequities. However, it may fall short of the triggers to boost the markets. Theexpected excise hike could act as a near-term depressant for certain sectors.
Excise duty hike – On the hit list
Corrective measures to repair India’s balance sheet seemimminent. The fiscal position stands stressed with a 16-year high deficit of6.8% of GDP (not accounting for off-balance sheet items and state deficits).With CSO advance estimates hinting at a GDP growth of 7.2% for 2009-10, thegovernment is bound to withdraw some of the stimulus doled out previously.
A hike of 2% in excise duty seems likely (excise duty was reduced from14% to 10% in December 2008 and to 8% in February 2009). The government willjustify this move citing the healthy upswing in automobiles and consumerdurables in recent months. Though a 2% increase should not hurt industryfortunes, anything above it may affect some. The excise duty hike will not onlyhelp the cause of declining indirect tax receipts, but also attune the exciseduty - service tax integration, ahead of the Goods & Services Tax (GST)introduction.
Disinvestment, GST roadmap; revenue focus
The government is likely to provide a roadmap for its disinvestment planand GST implementation in the budget. The government will aim at a sizeableinflow of Rs250bn from disinvestment proceeds (actual conversions will dependon stock market conditions). Given the certain delay in timely roll-out, thegovernment is now expected to target GST implementation before the end of 2010.
Other revenue-boosting measures may includecertain additions to the service tax net. There is also a possibility of a roll-back in service tax rate. We do notforesee any tinkering in corporate tax rates though. We expect the governmentto target Rs300-350bn from 3G auctions. The Draft Direct Tax Code may win amention, but being under consultation, the major amendments stated in the draftwill get the go ahead only in the year to follow.
Moderate GBS hike by 12-14%
Industry expectations of large allocation increases are unlikely to bemet. While media reports highlight the Planning Commission recommendation of an18% Gross Budgetary Support (GBS) hike, the actual rise could be in the rangeof 12-14%, given the need for expenditure control. The fiscal deficit for FY10would be ~7% and we expect the budget to target 5.5% of GDP next year.
Infrastructure development: In full steam
Infrastructure development momentum will continue with flagshipprogrammes like Bharat Nirman and JNNURM set to witness significant rise inallocations. The potential reform areas include transparency in PPP projectbids, land issues and the green signal to long-term bank finance forinfrastructure. Other moves include positive steps for affordable housing, arise in NHAI budgetary support besides national project status for certainstate irrigation projects.
Rural reform: High on agenda
The UPA agenda of inclusive growth will translate into key steps forrural development. The estimated 0.2% decline in farm output for 2009-10 makethis initiative even more critical. While allocations to the flagshipprogrammes will continue, the NREGA may not win large allocations as thegovernment would probably give priority to curb leakages and inefficientresources.