Budget 2010 - hits and misses

(Sanjay Sinha is the CEO of L&T Mutual Fund. The views expressed in this column are his own)

By Sanjay Sinha

The most striking feature of this Budget was that it was presented in a background of absence of any expectations. Experience with the vote on account of Feb 2009 and the first budget presented in July ‘09 by Pranab Mukherjee after the UPA’s thumping victory had made the markets wary.

Therefore, when he raised the income tax slabs and gave relief to those with salary more than Rs 3 lakhs, the euphoria on the street was not unexpected. To the corporate sector, with one hand he gave a reduction of surcharge from 10% to 7.5% and took away with the other in the form of enhancing the MAT from 15% to 18%. Reactions were mixed to this.

A government which is sworn to a social welfare agenda was expected to be profligate with budgetary discipline. Against a target of 6.8%, fiscal deficit for FY10 is expected to be 6.9%. But there is a resolution to limit it to 5.5%, 4.8% and 4.2% in FY11 to FY13.

This is good signal to both local and global investor. With the government borrowing programme limited to Rs 3,45,000 in FY11 there should be enough room left for the private sector to access funds.

There is an ambitious and official disinvestment programme to raise around Rs 40,000 crore and a 3G auction collection estimated at Rs 35,000 crore. Both of these are good initiatives. The former has a good line-up of state owned enterprises which will give an exposure to minerals sector, a sector which does not have a fair representation in the market. The latter should move the telecom revolution in India to the next generation.

Infrastructure spending has been kept at almost 46% of the Plan outlay or over Rs 1.73 trillion. Roads and Power sector have received an enhanced outlay of almost Rs 20,000 crore and Rs 5,130 crore respectively.

Urban development has been earmarked Rs 5,400 crore with housing and urban poverty alleviation getting an allocation of Rs 1,000 crore and the Rajiv Awas Yojana for Slum Development and urban poor segment seeing its amount hiked from Rs 150 crore to Rs 1,270 crore. The spending on the social sector has actually been enhanced to over Rs 1.37 trillion.

There is a stated intent to introduce the GST from 1st Apr 2011 and also to introduce an amended version of the Direct Tax Code in the monsoon session of the Parliament. The service tax and the STT (securities transaction tax) have been left untouched.

Could the FM have done much more? Surely. No Budget can be expected to address all issues at once. While he has introduced a new section 80CCF to allow the launch of Infrastructure Bonds which will provide tax relief up to Rs 20,000, he has left the limit under Section 80C unchanged at Rs 1 lakh.

This amount has become irrelevant with income levels having gone up all around.

This budget has scored high on its ability to balance growth with social sector obligations. Departing from the previous years, the focus is now on making public spending more productive.

In other words if keeping consumption alive was the need of the hour in 2008 and 2009, the requirement now is to create productive assets to yield dividends in future. There is now an intention to clock double digit GDP growth in 4 years from now.

This cannot happen overnight but a foundation has to be built to facilitate this. Therefore the disinvestment proceeds will now be used to create capital assets in the social sector. This is aided by the fact that the government has chosen to put Rs 26,000 crores by way of Direct Tax relief in the hands of the tax payer who is known be far more efficient in terms of utilization of surplus than the government.

Hence, the multiplier effect will be larger and the economy will get a boost.

The markets cheered the budget but the overhang of global factors has kept the celebrations suppressed. Once these clouds clear, we should see a greater optimism and sense of purpose filter through to the markets and give it a dose of adrenalin.

This is better than the nicotine that is inhaled through cigarettes, which the FM has chosen to tax at a higher rate.

(You can e-mail Sanjay Sinha at: SanjaySinha@lntmf.com)