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Budget likely to keep reforms tempo going

Saturday, 23 February 2013 - 9:00am IST | Place: Mumbai | Agency: DNA
The Union Budget is being set against a very challenging macroeconomic backdrop, characterised by high twin deficit, elevated and sticky inflation, faltering growth and very low business confidence.

The Union Budget is being set against a very challenging macroeconomic backdrop, characterised by high twin deficit, elevated and sticky inflation, faltering growth and very low business confidence.

The government has acted on several fronts -- liberalised FDI in multi-brand retail, green-lighted restructuring plan of state electricity boards, raised diesel prices, hiked railway fares, implemented direct cash transfers and is now working towards coal price pooling.

All these steps were unlikely just a few months ago. Apparently, markets have reacted quite favourably to these developments and now the expectations are ruling high.

From that perspective, the forthcoming budget is very crucial. It needs to carry forward the reform momentum and at the same time keep an eye on upcoming state elections in the second half of 2013 and general elections in 2014.

From revenue side, apart from minor tinkering with exemption list for excise duty or service tax or selective hikes in tax rate, it appears unlikely that the budget will make any substantial changes to the direct or indirect tax regime as any major tax hike may prove counter-productive by hurting the nascent recovery in business confidence. In other words, I do not foresee hike in headline excise duty and service tax rates in the budget. Keeping tax regime stable will send the signal that government is serious about GST rollout. Indeed, I do expect the FM to provide more clarity on the design of GST and its rollout.

Apart from that, the FM will also try to address the issue of declining financial savings (from estimated 12% of GDP in FY10 to 8% in FY12), especially incentivising the flow of savings in insurance and equity markets. Both of these segments have seen substantial decline over the last couple of years.

I do foresee 8-10% increase in excise duty in cigarettes and probably a diesel tax on higher capacity diesel SUVs. Both would be marginally negative for the sector. In pharma space, the FM may revisit the minimum alternate tax currently being levied on SEZs and may remove excise duty disparity between API and formulations. For banks, if the sectoral exposure limit for banks in case of lending to power sector is relaxed, it will be a big positive. Importantly, for the real estate sector, one thing to be watched for is whether the affordable housing gets infrastructure status or not.

Overall, since the FM has already outlined broad plans about the budget to restore the confidence in the economy, I expect no major surprises from the budget itself. It is likely to keep the reform momentum going and will be more reinforcement of what the government has been attempting.
 

The writer is president and head-wholesale capital
markets, Edelweiss Financial Services


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