Administration & Management

Governments come and go. But their visions outlined in the annual fiscal planning (the Union Budget) have a long lasting impact on the economy. The Budget of 1992 was one such document. It was a threshold that set India on a superior economic growth path. The first Union Budget of the current decade also comes to meet several challenges. It should not just counter risks within and outside the economy. But it needs to also fortify India’s position amongst global heavyweights.

Consequently in the Budget 2011-12, emphasis should be on maintaining and even accelerating the pace of growth and employment. The ensuing budget is expected to take note of the current scenario and announce policies and reforms to support and form a suitable base for the economy to continue to grow at 8%+ levels. In general one can feel that the budget would be skewed towards investment rather than consumption. Agriculture & related activities would continue to be the focus area as inflation and food security is high on the government agenda. Government would allocate higher amounts towards infrastructure (logistics, rural infrastructure and water management), education and technology to give a multiplier effect to the economy to sustain high GDP growth in the coming years.

The Union Budget 2011-12 might be a key from a policy stand point and may provide incremental direction to markets. There is an inherent value in India economy given the growth story and favorable demographics, but catalysts are required at macro level to deleverage the underlying value.

India was among the few countries in the world to implement a broad-based counter-cyclic policy package to respond to the negative fallout of the global slowdown. These policy actions has helped Indian Economy to clock a growth of 8.6% in FY11 (advance estimates). While rising strongly in the world economic order, India faces the most critical challenge of crossing the ‘double digit growth barrier’. Current macroeconomic challenges are manifold

1. Controlling inflation, including that for essential commodities,

2. Maintaining fiscal deficit amongst rising oil prices,

3. Absence of one-time revenues such as 3G, WiMax license fees,

4. Allocation & channelising investment in Infrastructure,

5. Domestic financial sector liquidity management with large government borrowing can potentially be a dampener for private investments,

6. Reducing current account deficit from current elevated levels,

7. Over and above, handling corruption issues.

The upcoming elections in some of the major states may prompt the government to continue to take some populist measures

Normal Expectations, on few Specific Fronts, from Upcoming Budget  are Deliberated Here Under

Higher short term capital gains tax for FIIs:

The volatility in Indian stock markets over the past six to nine months can to a large extent be attributed to fickle mindedness of the FIIs. Loose monetary policies in developed markets have not helped either. Hence, a stricter policy to curb short term capital gains earned with the hot money is in order. While the DTC has proposed to tax all FIIs, the current budget should lay a foundation for the same by hiking the taxes on short term gains.

Incentivise low income housing:

The construction sector is unlikely to have a very peaceful fiscal ahead. Low bank funding and high interest rates could stall projects and build up inventory in the sector. Allowing higher fiscal incentives on low income housing loans could address the problem of high cost for the houses as well as offer a solution to builders to increase sales.

Incentivise long term investment in equities:

Institutional investors such as insurance companies, PFs and mutual funds should be offered fiscal incentives on their schemes wherein investments are locked in domestic equities for 5 years and above. This could help draw more retail savings into equities for a longer term.

Pool in private sector funds for infrastructure investments:

Floating SPVs that can pool in private funds for meeting the 12th and 13th Five year plan targets may be an ideal way to meet the funding gap. Especially given that the contribution from the private sector is seen going up from 30% in the Eleventh 5-Year Plan to 50% in the Twelfth Plan.

Decontrol of Urea Prices:

Where as Government seems to be planning to raise Urea Prices by 2 to 5 per cent in 2011 – 2012. De-canalization of Urea imports is also expected once it comes under Neutrient Based Scheme Regime. Perhaps the fertilizer industry expects Rs 50000 Crore in cash for Financial Year 2012 by way of subsidies. It would not be a great surprise if import and export restriction on Urea trade are lifted.

Deepen India’s corporate debt market:

Developing a vibrant corporate debt market is paramount to serving the long term funding needs of corporates. The Budget should initiate policies in this direction so that retail participation in corporate debt issuances becomes easier and more transparent . The debt papers also need to be rated to suit investors’ risk profiles.

Rejig subsidies and off balance sheet items:

An increase of 245%! This is exactly how much the cost of major subsidies has gone up in India in the last five years. And mind you, this does not even include oil. In CAGR terms, it amounts to a huge 28%. When one considers India’s nominal GDP growth rate of 14%-15%, it quickly becomes clear that such a growth in subsidy is not sustainable at all. Fortunately, the Government seems to have woken up to this fact. Hence, rather than trying to increase subsidies further, it is now looking to reduce pilferage in the system. As a big step towards the same, it has set up a task force to create a way to directly transfer cash to the ultimate beneficiaries of various subsidy schemes. We believe in addition to reducing indirect subsidies, investing more in warehouses and logistics could help keep the food prices in India under control to an extent.

Always Yours — As Usual — Saurabh Singh