Budget 2010 Expectations

Budget 2010 : Sorry ! No Fireworks This time !

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When discussing expectations from budget , we see that this government has a balanced view on hot issues such as deregulation of power ( and all other politically sensitive issues) .The dynamics of decision making in this UPA government is to discuss & debate sort out such issues outside the budget. In the past too we have seen , crucial policy implementation outside the budget , in an attempt somehow to downplay the euphoria that traditionally surrounds the budget season. Although , the downside with this strategy is that now government fails to give a point wise policy-change agenda at a time most ripe for it with no left-front dragging its foot away and with the worst of the financial crisis over globally & healthy domestic growth.

So, as an investor or stakeholder one should be conscious of these facts – in short don’t over-expect.

Let me therefore cite my expectations and over expectations in that context!

Expectations

1)Fiscal Rollback : Partial Withdrawal

Given that RBI has come on record to say that next crisis could be in currency and fiscal following the government support worldwide to curb the financial crisis. Also , the FRBM targets have never been met since its incorporation.FRBM targets should however be revised in harmony with the business cycles. This could be done by hiking duties by 1.5-2 % in sectors that are going at about 20% or higher(Automobiles, consumer durables etc ) .However, the support for export-oriented sectors would ( hopefully )be continued .

2) Simplify tax and still raise revenues . However ,given the fiscal deficit ,no tax rate cuts are expected.

The Tax Code Bill 2009 talks of increasing the 10% slab to Rs 10 lakhs, 20% slab between Rs 10 lakhs and Rs 25 lakhs and 30% above Rs 25 lakhs.The difference between the current slabs and the New Direct Tax Code is very high. This budget may herald a smooth transition from current to new system.

Over-expectations :: However ,there is very slight chance that the slabs would be increased drastically. Incase , FM does so , it would make sense to even do-away with separate rates for capital gains and integrate it with income tax rates.Also ,to minimize the Wealth Tax rate and its floor cutoff .

3) Indirect Tax Reforms

· Phasing out CST ( currently about 2 %) is vital for smooth implementation of GST.

· All cess on for eg; R&D cess etc should be done away with , this will again be on –the-lines of GST, removing all indirect taxes.

· Initiation of the process of termination of “ Tax-holiday “for big players in the IT-ITES sector .

4) Reforms for Infrastructure

· Tax incentive scheme for infrastructure sector for areas including generation of power, development of railways, ports and airports and construction of oil pipelines.

· Tax incentives could be increased for projects including low carbon power generation such as hydroelectricity and wind turbines or low carbon transport infrastructure

· Encouraging PPP –especially in “housing for all”—making such PPP models more profitable especially in small cities.

5) Reforms in the Agriculture : Inclusive growth !!

Although government focus is back on agriculture , but sadly, it being a state subject , does require commitment and support from the state government as well.

At the Central level, some urgent measures are needed are

· Increase agricultural investment, particularly in irrigation in dry-land areas, research and extension.

· Increased effort to reduce regional inequality with particular attention to the eastern states and dry-land areas.

· Reform agricultural marketing, including a revamp of the Agriculture Produce Marketing Committee Act.

· Managing the food economy , through , better procurement and public distribution systems.

6) Health Care Reforms

Allocations for the National Rural Health Mission (NRHM), the flagship programme of the UPA, must increase both

in terms of size ( monetary) and scope (coverage of districts )

Debatable /Over expectations

1) Import duty on capital goods . (Revoked/ Minimized)

The war between Power ministry and Heavy Industries ministry can turn any side , but since the higher duties implies costlier power for common man , there is good chance such duties will done away with substantially .( Much to the dismay of local players like BHEL )

2) Deregulation of power and oil &gas sector

Given that 80% of our oil is imported and that content of our domesticconsumption will keep growing it is very necessary to align the global prices with global prices .This in turn will benefit fiscal consolidation in long run .

Based on Kirit Parikh Committee report Government is expected to do the following :

(a) Government must introduce free pricing of petrol and partially hike diesel

(b) However, Government( left with no choice ) will have to continue subsidy in cooking gas and kerosene to protect the poor and control inflation.

7) Reforms in the commodity market

(a) Commodity market hopes for entry of banks, funds and foreign brokers in the futures market in the forthcoming federal budget

(b) More autonomy to FMC, ( currently under Ministry of Consumer Affairs )

(c) Moot the idea of making FMC, common regulator for both exchanges and warehouses

(d) Removing ban on futures trading in few commodities

But, these move could be unlikely due to sharp rise in food prices which will restrict some decisions from UPA goverment.

3) Realty Sector

Infrastructure status to be accorded to integrated township projects.This will enable the developers to raise funds at cheaper rates and relaxed norms especially when there is increasing demand for affordable housing.