Silence of the drums

Published : Jul 31, 2009 00:00 IST

AS a tradition, local bands hired by brokers assemble outside the Bombay Stock Exchange every year just before the Union Budget speech begins. Whenever the Budget announcements favour industry, there would be a roll of drums.

When Finance Minister Pranab Mukherjee unravelled his Budget on July 6, the drumbeats were few and far between. The only loud sound came from the collective groan of traders and investors at the free fall of the stock market merely 15 minutes into the Budget reading.

The BSE Sensex plummeted by 859.65 points from 14,913.05 to close at 14,043 and the National Stock Exchange Nifty closed 259 points lower at 4,165.07.

We dont think that there can be good Budgets and bad Budgets but this one can sure be classified as a disappointing one. What was expected to be laid down was a path of liberalisation and fiscal discipline, especially after the release of an Economic Survey that was so vocal about liberalisation and disinvestments, according to Dalal and Broacha Stock Broking Pvt Ltd, a well-known broking firm in Mumbai.

What is worrying industry is the amount that the Central government intends to borrow from the market. The borrowings had gone up by more than 80 per cent last year and as per the Budget Estimates for 2009-10, they are expected to be raised by a further 50 per cent. This could definitely put pressure on interest rates to go up, say Dalal and Broacha Stock Brokers.

The market had increased to an unnatural high. While the Budget disappointed traders, the markets needed an excuse to fall. The Budget free fall corrected what needed correcting, says Ranjit Dongre from Bellwether Capital Pvt Ltd.

Besides, the Budget is not the space for announcing big policy changes. The Minister can do it in the course of time, he says.

While, industry in general is disappointed with the Budget, it has welcomed measures such as the abolition of fringe benefit tax (FBT) and the continuation of tax benefits to STPI units. Additionally, the commitment of the Minister to stick to the goods and services tax (GST) road map with effect from April 1, 2010, is seen as a positive move.

The proposal to introduce a simplified Income-Tax Act, after throwing open the bill for discussions and the extension of tax exemptions under Section 10A/10B by one more year have been welcomed.

Tax consultants PricewaterhouseCoopers made the following conclusions after conducting an opinion poll among top corporate executives:

1. There seems to be a lopsided view among industry leaders that the Budget 2009 could perhaps have outlined stronger steps to attain the projected growth rate of 9 per cent.

2. The Budget proposals may have reaffirmed the commitment to roll out GST as per schedule in April 2010 but this seems to be a somewhat ambitious target.

3. People are not in favour of taxing employee stock option plans at the time of exercise.

Overall, industry captains had mixed views on whether Budget 2009 had laid out a clear path to making the direct tax administration efficient.

Of the 300 executives polled, 86 per cent said no to: Has Budget 2009 put forward the right set of measures to achieve the projected growth rate of nine percent?. Yet when asked whether Overall, has Budget 2009 fairly met corporate Indias expectation from the new government?, 64 per cent said Yes.

The new UPA government has a three-pronged plan of action at this juncture: putting the economy back on track to achieve a growth rate of 9 per cent of GDP, ensuring inclusive development, and re-energising government machinery to provide high quality public service, security and rule of law. Budget 2009 reflects a modest first step in that direction, said Dinesh Kanabar of PricewaterhouseCoopers.

Industry does admit that there are many positive aspects to the Budget and that there is a plan in place to stick to the agenda of keeping the country on the track of economic growth.

The emphasis on rural development and infrastructure is also a positive indication that the government is concentrating on areas that need attention. For example, 42 million additional households will benefit from the increase in the allocation for the National Rural Employment Guarantee Scheme by 144 per cent, says a post-Budget report by the financial consultants Enam Securities.

The increase in allocation to the Bharat Nirman scheme will improve connectivity, irrigation and electricity needs in rural households. Furthermore, increase in agricultural credit and debt relief in the interest subvention scheme for farmers will have a positive impact on rural India, says Enam.

In a sector-wise analysis, Enam points out some of the benefits industry will enjoy. The FBT, GST, discretionary income (rural and urban and excise duties) will benefit the fast-moving consumer goods (FMCG) and retail sectors. Auto-fuel deregulation, which allows the setting up of an expert panel for petro-pricing, it is felt, will bring about stability.

The information technology sector has perhaps benefited the most. For instance, the abolition of tax on perquisites will benefit employees. A revision in allocations benefits all the education players in IT. Pharmaceuticals, among other sectors, will profit from the increase in the Minimum Alternate Tax (MAT) credit period.

The automobile industry got some attention with the reduction of duties on 2,000cc vehicles. The increased allocation under the Jawaharlal Nehru National Urban Renewal Mission is expected to increase the demand for buses. Among the negatives, Enam says the widely expected reforms in the banking and insurance sector were conspicuous by their absence. Even key areas such as telecommunications and real estate were neglected, the report says.

B. Muthuraman, Managing Director of Tata Steel, in his summary of the Budget said: I rate the Union budget as a balanced budget.The FMs commitment to restore the growth rate to 9 per cent, in my view, is the highlight of the Budget. Yet, he points out that he would have been happier to see a more elaborate disclosure of the governments medium-term plan, including disinvestments and subsidies.He said industry had expected a decrease in the corporate tax rate or abolition of surcharge, and introduction of incentives in the form of investment allowance for large projects. India needs significant capital formation in the manufacturing and infrastructure sectors and under the current economic conditions, the government should encourage capital spending in large projects, which can be globally competitive.

The chief economist of HDFC Bank, quoting the British economist J.M. Keynes famous theory that in the long term we are all dead, said, Pranab Mukherjee seems to have taken this advice seriously. Thus, while Budget 2009-10 attempts to net some short-term gains by putting more money in the taxpayers hands and allocating more funds to infrastructure and social welfare programmes, the absence of a long-term strategy for fiscal consolidation is disappointing.

Anupama Katakam
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