We expect significant positive measures for the rural economy, in line with the government’s agenda of inclusive growth, infrastructure development and educational reform. Announcement on disinvestment and GST roadmap will be tracked closely. The budget is unlikely to cause any negative impact for equities. However, it may fall short of the triggers to boost the markets. The expected 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 seem imminent. The fiscal position stands stressed with a 16-year high deficit of 6.8% 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, the government is bound to withdraw some of the stimulus doled out previously.
A hike of 2% in excise duty seems likely (excise duty was reduced from 14% to 10% in December 2008 and to 8% in February 2009). The government will justify this move citing the healthy upswing in automobiles and consumer durables in recent months. Though a 2% increase should not hurt industry fortunes, anything above it may affect some. The excise duty hike will not only help the cause of declining indirect tax receipts, but also attune the excise duty - 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 plan and GST implementation in the budget. The government will aim at a sizeable inflow of Rs250bn from disinvestment proceeds (actual conversions will depend on stock market conditions). Given the certain delay in timely roll-out, the government is now expected to target GST implementation before the end of 2010.
Other revenue-boosting measures may include certain additions to the service tax net. There is also a possibility of a roll-back in service tax rate. We do not foresee any tinkering in corporate tax rates though. We expect the government to target Rs300-350bn from 3G auctions. The Draft Direct Tax Code may win a mention, but being under consultation, the major amendments stated in the draft will 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 be met. While media reports highlight the Planning Commission recommendation of an 18% Gross Budgetary Support (GBS) hike, the actual rise could be in the range of 12-14%, given the need for expenditure control. The fiscal deficit for FY10 would 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 flagship programmes like Bharat Nirman and JNNURM set to witness significant rise in allocations. The potential reform areas include transparency in PPP project bids, land issues and the green signal to long-term bank finance for infrastructure. Other moves include positive steps for affordable housing, a rise in NHAI budgetary support besides national project status for certain state irrigation projects.
Rural reform: High on agenda
The UPA agenda of inclusive growth will translate into key steps for rural development. The estimated 0.2% decline in farm output for 2009-10 make this initiative even more critical. While allocations to the flagship programmes will continue, the NREGA may not win large allocations as the government would probably give priority to curb leakages and inefficient resources.
Measures to curb spiraling food inflation
Inflation control will be an important issue. The government will most likely attempt easing of pressures, food inflation in particular. One or more of regulatory actions like imposition of stock limits, futures contract delisting, movement restrictions and de-hoarding drives could be used. Measures to address supply side issues like augmentation through imports may also be taken.
Pro-Education norms: Noteworthy rise
We expect an substantial rise in both primary as well as secondary education allocations. The new fundamental Right to Education between 6 to 14 years of age would be the focal point of reform. The Sarva Siksha Abhiyan is also likely to get a boost.
Other targets: A mixed bag
The budget could also address the need for primary healthcare and public health in semi-urban and rural areas. Attempts towards reducing the ultimate cost to patients may be made.
The SEBI demand for doing away with tax benefits to corporates investing in mutual funds, if implemented, would increase the corporate tax outgo, closing the arbitrage. This would be a major negative for the mutual fund industry. This isn’t an expectation from our end but cannot be ruled out.
No significant measures seem likely for Exports and Information Technology. The government would prefer to wait and watch on how the global economy fares in the coming time.
The defence space is likely to witness increased spending this year.
The matter related to Fuel price hike is expected to be taken up after the budget.