Macro economic expectations
Budget 2010-11 will be presented against a backdrop of reviving economic conditions. The year 2009-10 saw all the economic indicators painting a healthy picture of the economy after a year of subdued growth. GDP has started to accelerate; IIP has gone into a double digit growth trajectory. Exports have entered into positive growth zone. All these indicate a robust economy but these are still incipient signs and the economy still faces a huge risk in the form of inflation which is expected to reach double digit by this fiscal end. Finance Minister Pranab Mukherjee faces dilemma in the form of managing inflation and at the same time pushing the economy firmly on the growth path. In order to maintain growth momentum, fiscal stimulus needs to be maintained but the cost of retaining fiscal stimulus is high fiscal deficit which the country cannot afford. What strategy he adopts to balance all these contrasting factors would be unveiled on Feb 26, but this is what we expect the budget 2010-11 to come up with.
Corporate sector is lobbying to bring down the corporate tax rate but considering the deficit reduction target of Govt and implementation of Direct tax code and Goods and services tax, we do not expect any change in the corporate or individual tax rate. A hike in the tax revenues is projected, seeing the buoyancy in the corporate bottom lines. Tax revenues can be expected to grow at a healthy rate of 20% as against a decline witnessed in the current year. With a robust growth observed in the industrial production, the customs and excise collections too may be projected to rise after the decline observed in the current year. The current Budget that penciled in only Rs.1,120 Cr as disinvestment proceeds, marked a conservative approach in budgeting Non-Debt Capital Receipts. However the estimates for disinvestment proceeds for FY 2010-11 could be buoyant at Rs.30,000 – 35,000 Cr. Proceeds from 3G auction are also expected to be realized next year and thus we expect a non-tax revenue of Rs 1,40,000 cr in this budget year. Overall, revenue receipts are expected to grow by 15.4% over that of the budgeted figure for 2009-10. Total receipts are expected to grow about 20% to Rs 7,43, 061 cr in the year 2010-11.
Budget 2009-10 saw expenditure burgeoning 13.3% to Rs 10,20,838 cr. This year emphasis would remain on reining in expenditure. The Plan Expenditure would be in line with the Gross Budgetary Support approved by the Center. It is estimated at Rs.3,73,000 Cr for FY 2010-11 marking a YoY growth of 14.7%. This fiscal would not be burdened with extraordinary inclusions such as 6th Pay Commission Arrears or the farm loan waiver scheme. Marking a trend based growth in the expenditure for various other heads, the total non-plan expenditure is estimated around Rs.7,40,000 Cr. The total expenditure for the year to come is projected in the range of around Rs.11,12,200 Cr.
Considering the revenue and expenditure our fiscal deficit estimation for FY 2010-11 stands at around Rs.3,70,000 Cr lower than Rs.4,00,996 Cr for the current year. Estimating a growth of 11% for the next fiscal the GDP at market prices would stand between Rs.68,00,000-69,00,000 Cr. Fiscal deficit at Rs.3,70,000 Cr would then imply a fiscal deficit to GDP ratio of 5.4%, close to the figure of 5.5% that has been targeted in the several statements made by various Finance Ministry Officials.
We expect that Rs 3,60,000 cr- Rs 3,70,000 cr of the deficit to be financed by market borrowing. Adding to that appx redemptions of Rs 1,15,000 cr we get a gross market borrowing in the range of Rs 4,60,000 cr to Rs 4,75,000 cr against a borrowing of Rs 4,51,000 cr for the year 2009-10. We expect that major part of the borrowing will be completed in the early part of 2010-11.
There are a lot of concerns over the withdrawal of fiscal stimulus. Like most of the newspapers and economists, we also expect a selective and gradual roll back of stimulus measures. Broad stimulus measures included enhanced spending on critical rural infrastructure and social security measures, payment of dues under 6th pay commission, and waiving of agricultural loans. All these are mostly irreversible measures and offer no scope for a roll back. The areas where we might see some steps taken are excise duty and service tax rates. Excise duty was reduced from 12-14% to a mean rate of 8% and service tax rate was reduced from 12% to 10%. While excise duty for some of the sectors like automobile, cement and FMCG might be increased, export oriented sectors might be spared as recovery in exports is still fragile. Service tax rates might not be tinkered with as it is linked to implementation of Goods and services tax (GST) but we might see an expansion in service tax coverage.
Author: Praveen Bajaj, B.Com(H), MBA (SCMHRD)