Industry Expectations - Budget 2010 - 2011
FY2011 Union Budget: Restoring India’s fiscal Position - Vikram Kotak, Chief Investment Officer, Birla Sun Life Insurance
Union Budget is likely to appear as a non-event for the markets as it is unlikely to announce big-bang reforms. However, it assumes significance from the fact that we expect it to lay forth the structural footprints for the next 5 years of economic growth. It will also have more anxious audience than its counterparts in the past. The global rating agencies would be looking forward to a comprehensive plan for rolling back the fiscal stimulus and reduction in fiscal deficit in order to revisit India’s sovereign rating. Further, the Finance Ministers across the world, esp. troubled economies like Euro, Japan & US, would look for guiding light on striking a balance between growth and fiscal consolidation and how to revive domestic demand.
Overall, given the challenging economic backdrop, the government has done a commendable job. Action on implementing 36 of the 45 major announcements has already been completed or is in the final stage of completion. The quality of execution has been far better than that seen in the past. Few significant policy initiatives include strong traction in disinvestments which will garner ~ Rs.13000-Rs 14000 cr in FY10 against budgeted Rs.1,120 cr, introduction of a nutrient-based subsidy regime, clearance of the Rights to Education Bill and formation of the Unique Identification Authority. Higher spending on infrastructure and social sector cushioned the economy during the downturn (esp. NREGS and JNNURM). The price hike in Urea with political consensus is a clear indication of government’s intention to take structural ground-level measures. Ambitious road projects and draft Direct Tax Code have been laid down, however, their execution will be the key.
Going forward, whether the stimulus will be and should be withdrawn or not is no longer a debatable question. What is pertinent is a clear roadmap on how it will be done. India has already withdrawn 40% of the monetary stimulus. With economy already on a sustained recovery path, we expect fiscal stimulus to also follow suit, in a gradual and calibrated manner without snapping growth. The government would attempt to finely balance the dual objectives of sustaining growth momentum and addressing fiscal consolidation. Social programs and infrastructure spending are likely to remain other key focus areas. All eyes will be on this budget to get some headway on implementation of the new Direct Tax Code, guidelines for smoother transition to the proposed GST regime, auction of 3G telecom licenses, reforms pertaining to FDI limits for the insurance and retail sector and concrete steps to augment infrastructure financing through the ‘takeout financing’ scheme of IIFCL.
The government should not miss the opportunity of fiscal consolidation as it did in the growth phase of 2003-2007. At this juncture, it is pertinent to note that the economy does not require big promises. The need of the hour is the timely execution of the unfinished agendas which has the potential to take India to the next growth trajectory.
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Union Budget