Vikram Kotak, Chief Investments Officer, Birla Sun Life Insurance Co. Ltd.
The UPA’s first budget due in early July is the next big event on the Indian macro front. While expectations are high, we believe that hopes on economic reforms in year one need to be realistic as the government would need to adhere to measures that got them re-elected. Also pending state elections will also play an important role in deciding the budget. As regards headline deficit numbers, we believe there could be a marginal improvement over FY09 levels due to better growth prospects, higher non-tax revenues and divestments, which will likely offset expenditure on the rural and social sector.
The Union Budget…Expectations must be realistic
In line with the government’s mantra of ‘inclusive growth’, the emphasis of the budget will likely be on social infrastructure (education and health), rural and agricultural growth, and infrastructure financing. We thus continue to expect a focus on all its flagship schemes. One could also see further measures to aid sectors such as SME and exports – both of which have been affected by the global downturn.
Revenues to be aided by Non-tax revenues and Divestments
- Tax Revenues – No major changes
While there are clear green shoots, growth is still sub-par. Thus we do not immediately expect any reversal of measures announced in the stimulus packages in the UPA government's first term. While the overall tax structure is likely to be unchanged, measures could be aimed at improving compliance, plugging leakages, a further widening of the tax net by including more services and the continuation of the process of rationalizing taxes to enable the government to introduce the harmonized Goods and Services Tax (GST) in 2010. We expect reduction in the Central Sales Tax (CST) rate from 2% to 1% in the budget. - Non-Tax Revenues – 3G Auctions
Another factor that could help offset expenditure would be revenues from the auction of spectrum licenses for third-generation (3G) mobiles. The cost of each license is expected to be at US$1.0-1.5bn; which would potentially generate revenues to the tune of US$8-10bn. Revenues generated from these auctions would classify as ‘non-tax revenues’ in budgeted numbers for FY10. - Divestments – Key to offsetting higher expenditure:
Divestments are now formally on the government’s agenda with the president stating that there will soon be a roadmap for listing PSUs. While ruling out privatization by saying that government equity is not likely to fall below 51%. Government plans to raise around Rs. 100 bn in FY10. However, the bottom line is that divestments, which have been on the back burner for a long, long time, will likely see the light of day.
Expenditures – Continued Focus on Social Sector Schemes but infrastructure could be back on the radar
Social Sector Schemes to get priority: In line with the government’s mantra of ‘inclusive growth’, the emphasis of the budget will likely be on social infrastructure (education and health), rural and agricultural growth. We expect continued focus on all the flagship schemes - Sarva Siksha Abhiyan (Rs.131bn), Bharat Nirman (409bn) , Jawaharlal Nehru Urban Renewal Mission (118.4bn) and National Rural Health Mission ( 120bn) as well as a further extension of the National Rural Employment Guarantee Scheme( 301bn). Despite significant increase in allocation in social schemes in the interim budget, we expect further increase in allocation in the current budget in the schemes.
Infrastructure: Financing India’s infrastructure deficit is likely to be a major focus area. To this end, one could see measures to open up the debt market, given that of the total investment requirements of US$517bn, debt financing is estimated at US$247bn. This could include tax exemptions on infrastructure bonds, further raising limits for viability gap funding.
Direct Taxes: We are not expecting major changes on the Direct Taxes front except simplifying procedural hurdles for the industry at large. Some minor changes may include
- Might extend the current Income Tax rules to provide 100% tax breaks on profits to many IT units as promised under the Special Economic Zone Act.
- Hike the exemption available for interest payment on home loan to Rs. 2.5 lakhs from currently Rs. 1.5 lakhs
- May do away with fringe benefit tax (FBT), cess and surcharge on corporate taxes and replace it with single tax rate of 34%.
- May remove STT to bring down trading cost and increase volumes.
Industry: As industrial growth is a long-term proposition, it is rather difficult to predict as to what measures the Union Budget (2009-2010) will take to reverse the slowdown in the manufacturing sector. The Finance Ministry would have to provide stimulus to the micro and small enterprises through some well-designed & effectively executed policies.
Pending & new 'Structural' Reforms: To be undertaken over the next 6 months
Pending legislations include, amongst others, those concerning the liberalization and further opening up of the insurance, pension, banking, retail, real-estate and telecom sectors. The new Government is also expected to put in place policies for attracting private investment for oil exploration will also be followed for other mineral resources, including coal and iron-ore. Further, structural reforms in the areas of infrastructure (encouraging greater private participation), subsidy rationalization, judiciary (including police reforms), labour laws and social security can be expected to be on the anvil in the near-to-medium term.
