INDIA BUDGET 2009-10

WHAT LIES AHEAD?

Indicus Analytics

12th February 2009

Budget 2009-10 to be announced February 16th 2009 With polls scheduled for April, there is confusion over whether this is a vote-on-account/interim budget/budget Important:  All budgets go through a vote on account procedure till final approval gets the Budget passed a couple of months from announcement. (See Budget in India by Deepa Nayak) Since the poll dates have not been announced yet, this is a regular budget and not an interim budget.

BUT

The current government has a moral responsibility, since there is a possibility of not staying in power, it should refrain from letting it be ‘ business as usual’.

This budget should therefore not put in high spending budgetary provisions, And should leave major changes to the next government.

Expectations from government are high

Because of the financial shock and the recession in the West, growth in India has slowed down from 9% last year to estimated 7.1% this year.

Since boost to economy comes from monetary and fiscal policy, budget is being watched.

Demands are many, some that are the same year to year, despite economic performance e.g cut in excise duties, etc.

FICCI for example has asked for:

Extension of interest rate subsidy of 2% to exporters till March 2010.

Reduction in income and corporate tax rates, removal of surcharge

Extend tax holiday to housing sector and exempt it from service tax.

However, the budget should stick to across the board stimulus – e.g reduction in VAT for all items, no sector–specific strategies. Right now every sector has been hit, except education, health and to some extent FMCG. Allowing the markets to get the right signals is important, rather than fudge them with selective measures.  

Sector performance

Most affected

Garments, Gems & Jewellery

Textiles

IT and ITES

Capital Goods Engineering

Basic manufacturing

Organized real estate

Higher end Auto, Electronics, Durables

BUT Worrying Fiscal Situation Various estimates but all point to sharp rise in deficit numbers. This year already the fiscal deficit has gone up from a budget estimate of 2.5% of GDP to 6%, thanks to falling tax collections, farm loan waiver, pay hikes to govt servants. Gross fiscal deficit, including oil and fertilizer subsidy bonds will be 9.5% of GDP compared to 6.1% last year, says Fitch. Govt borrowings highGovt has changed its borrowing programme Four times this fiscal, now an additional Rs. 46,000 crores to be borrowed by March end

Calling for greater fiscal stimulus is not advisable.

Laveesh Bhandari in an interview to Outlook : Many macro-economists are calling for greater and greater government expenditures. And that is making me very uncomfortable. There is an ongoing growth story at the very minimum at the 5% level and likely to be at the 6%-7% level. Things are not, in the aggregate, as bad as the corporate sector is making it out to be. Of course, many sectors in the organized sector have been very badly hit. But it is not the government’s job to save the organized sector at the cost of the economy’s long term growth. And long term stability and growth will be impacted if public sector investments are ramped up, and the government liberally spends the money it does not have. You cannot costlessly keep on increasing the deficit – and you don’t need to be a PhD in macroeconomics to know that. Something somewhere will give if the deficit figure reaches (say) 15%. It already is at the 10% level. So if the government goes on an unconstrained spending spree, something will go wrong somewhere -

inflation, exchange rate, crowding out of private investment.

Best Advice Possible to give the government:

Remember: Short term growth is important, but long term economic and financial stability is much more important.

Some trivia to end with: How unusual is this year? The budget speech should have been with PC Chidambaram, who was transferred abruptly and unhappily to Home in December. Though the PM has the Finance Portfolio, he is at his home resting after a bypass, so the speech will be by External Affairs Minister, Pranab Mukherjee.  This is also the first time a PM is missing the budget session of the Parliament.

 

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