Trend hits a plateau
SARAVANA KUMAR
Head, Fixed Income Invest., SBI Mutual Fund
In the Union Budget, the finance minister tried to stimulate economic growth by lowering taxes, increasing the disposable income and reducing the interest rates.
The removal dividend tax, capital gains tax, reduction of custom duty, lowering the surcharge, rationalisation of excise duty, modernisation of tax administration and introduction of state value-added tax are positive steps to boost the economy growth. The positive news is the emphasis on infrastructure development through government-private partnership.
The government projects the investment in the infrastructure is closer to Rs 60,000 crore.
The 100 basis points cut in the small savings rate i.e, public provident fund, National Savings Certificate etc was higher than the consensus expectations of 25-50 basis points.
The reduction brings the small savings rate closer to market level. The Reserve Bank of India (RBI) has responded to those cuts with 50 basis points reduction in repo rate (5.5 per cent to 5 per cent) and saving bank deposit rate (4 per cent to 3.5 per cent). In the government securities market the prices had moved up on the Budget day by 50 basis points in the 10-year segment.
Where do we see interest rate in future ? Let us, analyse some factors which are critical for the interests rate movement.
First, government may find difficult in reducing the expenditure. The fertiliser, food and other subsidies will be higher by Rs 8,000 crore and defence expenses may overshoot by Rs 10,000 crore. On the revenue side, the government may find difficult to achieve tax revenue growth of 12.5 per cent.
The Budget assumes gross tax collections will increase 13 per cent. This figure is based on a 15 per cent increase in income tax, 18 per cent increase in corporate tax, 11 per cent in excise duties and 8.5 per cent increase in custom duties. The disinvestment target of Rs 13,200 crore also may be difficult to achieve considering the track record of the last 3 years.
So, we may expect the fiscal deficit to overshoot by Rs 18,000 crore to Rs 1,71,000 crore. The Union government is planning to buy back commercial banks
