Union budget 2009-10

(Ved Prakash Chaturvedi is the Managing Director of Tata Asset Management Ltd. The views expressed in this column are his own)

By Ved Prakash Chaturvedi

The annual Budget presentation exercise of the Government over the last few years increasingly has been seen more as a statement of accounts with particular focus on the broad policy measures and intent of Government spending in the coming few years rather than an opportunity for specific details of reform moves.

This trend has continued in this Budget. After the Elections, this is the first economic policy statement that this Government was making. Also it was the first of the five successive such statements that the Government will make.

Hence, we heard the FM talk about the emphatic policy intent of looking at the strategic perspective and talking about key focus areas like soft infrastructure, hard infrastructure, roadmap of public finances, increase in FDI limits, divestment programme, etc.

The backdrop to the presentation of the Budget presented a mixed picture. Global slowdown, slipping fiscal prudence, the need to provide stimulus to the domestic economy, high liquidity overhang and yet high real interest rates.

The Budget had the difficult task of attempting to stimulate equitable growth and large investment while projecting a path towards improvement in public finances.

The stock markets have given an emotional negative reaction to the Budget given the fact that expectations on details were high.

The general expectation was that this was actually the first Budget of a highly reform oriented Government free from constraints and hence specific policy details in areas like divestment, infrastructure development, improvement of public finances and increase in overseas investment limits in various sensitive industries will form the highlights.

However, the Budget actually touches upon all these areas with emphasis while leaving details for later. It is clear that future policy announcements referring to these details of the measures to come will need to be watched carefully.

Once the market digests this and starts looking to the future and to the fundamentals of the Indian economy and as overseas investors understand the fine print, nerves will settle.

With the direct tax proposals being revenue neutral and with a marginal increase in taxes, it is quite evident that the fiscal deficit will most probably be higher than even the estimates and markets will start to worry about inflation.

A higher fiscal deficit is likely to put continued pressure on long bond yields. Thus, bottom lines of companies and large projects will continue to be under pressure because of higher interest costs. Introduction of higher MAT will further cause concern to some companies.

It should however be noted that the Budget specifically speaks about concerns on fiscal slippages and the intention to put in place a renovated medium term FRBM policy.

Though the immediate impact of the Budget is unlikely to cheer the markets, some bold moves have been initiated which in the long run can prove decisive for sustaining the growth momentum of the economy.

Building of infrastructure in certain key areas e.g. roads where a target of 7,000 KMS. per year has been fixed. Focus on urban infrastructure, increasing the efficiency of the rail infrastructure, etc. seem to be definite positive moves. Similarly, the significant focus on disinvestment with Indian investor participation can yield huge results if continued persistently over a 5-year period.

The removal of surcharge of 10% on personal income-tax will come as a good relief for tax payers.

This should generally be positive for stimulating retail consumption demand. The statement of the timeline for introduction of GST would also enhance the efficiency of the tax structure. These tax measures though modest will certainly help boost consumer sentiment.

The Indian economy is capable of delivering high growth rates of over 8% provided its key enablers viz. investment, infrastructure, inclusive polity and a stable geo-political climate are in place.

While walking a narrow path between the need for stimulating growth at the same time promoting fiscal prudence, the Government has certainly emphatically talked about its determination of ensuring that these enablers are in place. In a difficult global scenario, India will stand out as a growing economy, once nerves settle investors will come back.