Budget: Don't expect drastic changes

Kumar Raj

The country's annual Budget exercise is more than just an account of year's income and expenditure projections. It is a statement of economic, social and administrative policy intent and direction of the ruling government. Therefore, if anyone is looking for drastic change, it will only be a disappointment. The simple reason is that there is no change in the government that has been heading it for the past five years.

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In my opinion, the Budget theme should spell continuity of recent policy specifics that was imbedded on the two stimulus packages unveiled since October 2008 - i.e., stimulating domestic consumption and employment through spending targeted at creating purchasing power at the bottom of the society. Building infrastructure will also remain as a central phrase.

The core direct and immediate beneficiaries will be the rural and urban mass that forms the tier two of our economy. The UPA government has already tasted the positive impact on society, economy and the party politics through engineering vibrancy at the bottom of the society, particularly since the success of Bharat Nirman and Nation Rural Employment Guarantee Schemes.

Key focus areas

Therefore, the main theme will be empowerment of the urban and rural low-income group with improved opportunity for employment, income and purchasing power, through building physical and social infrastructure. Priority will be to improve employment, income and quality of life at the lower end that could generate domestic consumption growth.

There could an additional spending of Rs 70,000-80,000 crore, over and above the spending proposed in February's vote-on-account Budget. This spending will be mainly on rural infrastructure such as irrigation, electricity, roads, communication and building low-cost rural and urban housing and social infrastructure.

Support for SMEs

There will be some relief to distressed segments of tier one economy that felt a severe negative impact of recent global events. The SME sector should get beneficial policy decision and enhanced support from SIDBI and commercial banks. Benevolence to commercial vehicles segment will be in the form of speeding up Governments replacing old stock of buses and extension of depreciation benefit.

Textile is another area, the second largest employer next only to agriculture, which is reeling in pain due to shrinkage of global demand. We could expect tax reliefs to generate domestic demand through cut in duty on inputs such as yarn, dyes and chemicals and also extension of Textile Upgradation Fund. All special export incentives provided under earlier stimulus packages could also be extended beyond prescribed deadlines.

Mega projects

Core infrastructure development has been the policy specific for many years, but it has all along lagged behind in implementation. This time, we will certainly see a strong policy and administrative push to speed up such projects. Power, highways, metro transport systems, water transport, ports and airports will all get special thrust. Unconventional energy source such as solar, tidal and waste along side push to mini hydro-electricity projects should get a further momentum. They also should target for an additional energy capacity of 8000 MW through nuclear inputs.

Besides, provisions will be made to meet the election promises such as food grains at Rs 3 per kg for BPL family, food security law, expand NREGA, low-cost housing for urban slum residents. Mamata too would have her pet low-cost train passes, for BPL family, announced a couple of days ago. Even private sector will be encouraged to employee educated backward cast youth.

There has been a lot of talk about reforms getting a leg up in the absence of negative influence from the Left. Here is where I expect a lot of disappointment, particularly in the area of banking, labour, public private participation and of course fiscal prudence. Yes, some of the expectations have already been sounded out in areas such as extension of STPI, education, PSU disinvestment and power.

Tax revenues

As there will be a drastic slowdown in tax revenue collection, deficit financing will be the key source of funding to stimulate domestic demand. Fiscal deficit could be Budget close to 6% level, but I expect it to shoot over 7% as the year come to a close. Domestic money supply condition being smooth, I do not see much strain in funding this deficit.

At the State level Governments, that have sideline small savings schemes (SSS) for a while on the back of huge revenue receipts from oil based products, will be forced to reactivate SSS. This competition for funds from both the Centre and State should keep the pressure on domestic interest rate and I believe that there is little scope for any further fall in the rate of interest. 

Reforms schedule

Reforms schedule	Action plan
Banking	Delay
Insurance	Soon
Pension	Medium
PSU - Privatisation	Never
Disinvestment (Dilution)	Soon
Coal – PSU dilution	Soon
Private Participation	Medium
Fiscal Subsidy	Medium
Fiscal prudence	Delay
Separating Govt. Treasury	Medium
Rupee full convertibility	Delay
Consol. of banks (recap)	Soon
Power – Utility	Soon
Tax – GST	Soon
Services in VAT	Medium
Extension of STPI	Soon
Remove octroi	Delay

Administrative reforms

*Soon: within 12 months , *Medium: 1-3 years , *Delay: over 3 years

The author is an economist, financial and capital market analyst with over 30 years of experience in various aspects of the financial services industry and journalism.

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