February 28, it is that date on the calendar which probably everyone, from politicians to CEOs to salaried class put a mark and make sure that they pay heed to one guy who has the potential to put a hole in your pocket. The guy is Finance minister and the event is The Union Budget.
Just read about our current FM Mr Pranab Mukherjee that he was rated one of the best finance ministers in the world by Euromoney magazine in 1984. I hope he still retains that status in mind and spirit and delivers a budget which would address most of the bigger concerns looming on the economy currently.
First I would like to take you through several concerns which are likely to be on top of the mind for FM
Inflation has been a continuing concern for the last few months now and the same has not shown any signs of receding. Though WPI has moderated in the last month, but with crude prices touching sky high and high subsidy burden, there is no respite in near future.
Managing growth would be a big challenge considering the high inflation and the corresponding high interest rates in the economy. Industrial production, if IIP is to be believed, has already started moderating. There are good chances that effect of moderation may spread to other sectors of the economy.
Political agenda of the ruling party also needs to be balanced. With state elections in 5 states in the current year, FM cannot think of aggressive measures which might be regarded as pro-populist.
Fiscal deficit needs to be bought under control. For current fiscal, deficit is budgeted at 5.5% of GDP while for the next fiscal i.e FY 2011-12, the same is expected to be budgeted at 4.8%. Conservative calculations show that at 4.8%, there would be a deficit of appx Rs 3,78,000 crore, which is just marginally lower than last year’s figure of Rs 3,81,408 crore.
How to finance this deficit?
Last year, revenue had excess collections from 3G spectrum which could cover up for some of the deficit but this year likelyhood of such windfall gains is less. Again with the current mood of pessimism in the equity markets, divestment proceeds also would be difficult to target. So how does this deficit be financed? This brings me to my expectations from budget.
Increase in indirect tax rates
In arriving at the above figure of Rs 3,78,000 crore, I have kept the revenue growth target of 21% which is quite optimistic given economic growth rate of around 8-9%. Thus, in order to reduce the deficit, some measures to increase the revenues are expected. This view is also confirmed by talks of fiscal stimulus rollback. Hence, I will expect increase in indirect taxes like excise or service tax along with an increase in number of services in service tax net.
Divestment of stake in PSUs
FM would likely announce stake sale in PSUs in order to augment the divestment proceeds of the revenue. Government already is short of current year’s target of Rs 40,000 crore which will be included in next year’s divestment proceeds. I believe FM will have to part with stake in more PSUs in order to bridge the increasing fiscal deficit.
Infrastructure to continue to remain focus area
Major thrust area of expenditure will continue to be infrastructure particularly power, agricultural infrastructure and water resources. Along with this, other measures for increasing the amount of private sector funds available to finance infra needs would be announced.
Increase in minimum income tax exemption limits for individuals
Minimum exemption limit for individuals would be increased considering the high inflation and a move towards convergence with the proposed Direct Tax code (DTC). There are muted expectations that corporate tax rate would be reduced but I think that would be difficult to do considering the increased revenue needs of the government.
Commitment to inclusive growth through social spending schemes
Government’s spending in social sector has been on uprise in the last few years due to emphasis on inclusive growth and reducing the disparity of income. Schemes like NREGA, Bharat Nirman have been appreciated and thrust is given to increase the effectiveness of these schemes through use of information technology.
Increase in FDI for selected sectors
Faced with mounting concern of current trend of financing the increasing current account deficit by FII money, there will be efforts to increase the FDI flow in the country and this would be through increasing the FDI limit in sectors like BFSI, retail and media.
Overall, common man obviously would be benefitted by measures for containment of inflation. But in all, I think this budget might not deliver all good things to hear, there might be some hard hitting measures which are necessary and would be good for the economic health of the nation. Considering the fact that this is the third budget by current government, this is the time when FM would be able to take some tough measures.