ExpertSpeak: Shishir Asthana, an independent investment banker
Little was expected from the finance minister (FM) Pranab Mukherjee and he delivered little. The only cheer from the budget is that the FM has not rocked the boat by increasing the corporate tax rate, which was expected in some quarters.
A hike in the service and excise rates was already discounted by the market and is probably the best feature of the market as it increases the tax basket for the government and removes the impetus given by the FM by reducing the excise rates that were done after the Lehman crisis.
But that is were the good news ends.
The budget is full of extremely optimistic and at times faulty assumptions. While the fiscal deficit for the present fiscal has been assumed at 5.9% of the gross domestic product ( GDP), economists expect the number to be around the 6.1% level. The lower number has been possible as the minister has not taken the amount it has to shell out to the State Bank of India (SBI) and the urgent need of providing for funds to the petroleum and fertiliser sectors.
It is the next year’s number that is a give away. The FM is expecting a deficit of 5.1% next year. This is based on a GDP growth of 7.6% at a time when the gross borrowing limit has been increased to Rs5.69 lakh crore. Even the Reserve Bank of India (RBI) while reacting to the budget has said it will be difficult to cut the interest rates on such a high quantum of borrowing. These borrowing levels are Rs60,000 crore higher than the current year’s actual figure. In fact, in the current fiscal the government had already overshot its target by Rs92,000 crore. With over Rs152,000 crore of extra borrowing, it will be difficult to bring the interest rates lower and thus give the boost the economy needs. This in turn will make it difficult to reach the growth target achieved by the government.
More than the difficulty in meeting the revenue target, the government will find it more difficult in meeting the expenditure target.
The FM has grossly under provided for expenditures like fuel and fertiliser subsidies. In an environment where international oil prices are expected to move higher, the provision of Rs40,000 crore is completely inadequate, especially since diesel subsidy in the current year itself is Rs80,000 crore. Given the political compulsion and the state of the economy, it will be very difficult for the government to hike the fuel rates.
A lower provision for food subsidy is also politically not possible at a time when the FM’s party has performed miserably in the elections and the Mahatma Gandhi National Rural Employment Guarantee Act and the food bill are considered by the high command as absolutely essential for political survival.
Mr Mukherjee has also provided for only Rs16,000 crore for capitalising banks, in a year when the SBI alone would need that amount, even if we assume that this year’s promise of Rs7,900 crore will be provided.
The FM has also taken credit of Rs40,000 crore from the telecommunications ( telecom) auctions. This, at a time when it has to pay Rs10,000 crore as refunds to the existing telecom companies as per the Supreme Court’s ruling on the 2G scam. Further, with most of the companies ridden with high levels of debt and the poor response of 3G roaming, it will be very difficult to meet the target.
Though these events will be forgotten by the market over the next couple of days as Europe and the inflow of liquidity takes centre-stage, what will not be forgotten are the changes made by the FM in Section 9 of the Companies Act which affects all foreign direct investments ( FDIs) in the country since 1962. The draconian law has the potential of virtually freezing FDI flow in the country as companies would now be jittery in investing in a country where laws are changed on a retrospective basis. Irrespective of the difficulty in implementing this provision, the fact that such an act has been done will be enough to scare investors.
Unfortunately, Mr Mukherjee will not be remembered for all the good things he has done of late in keeping this government intact, but will always be cursed for introducing a change with a retrospective effect.
....more info
Little was expected from the finance minister (FM) Pranab Mukherjee and he delivered little. The only cheer from the budget is that the FM has not rocked the boat by increasing the corporate tax rate, which was expected in some quarters.
A hike in the service and excise rates was already discounted by the market and is probably the best feature of the market as it increases the tax basket for the government and removes the impetus given by the FM by reducing the excise rates that were done after the Lehman crisis.
But that is were the good news ends.
The budget is full of extremely optimistic and at times faulty assumptions. While the fiscal deficit for the present fiscal has been assumed at 5.9% of the gross domestic product ( GDP), economists expect the number to be around the 6.1% level. The lower number has been possible as the minister has not taken the amount it has to shell out to the State Bank of India (SBI) and the urgent need of providing for funds to the petroleum and fertiliser sectors.
It is the next year’s number that is a give away. The FM is expecting a deficit of 5.1% next year. This is based on a GDP growth of 7.6% at a time when the gross borrowing limit has been increased to Rs5.69 lakh crore. Even the Reserve Bank of India (RBI) while reacting to the budget has said it will be difficult to cut the interest rates on such a high quantum of borrowing. These borrowing levels are Rs60,000 crore higher than the current year’s actual figure. In fact, in the current fiscal the government had already overshot its target by Rs92,000 crore. With over Rs152,000 crore of extra borrowing, it will be difficult to bring the interest rates lower and thus give the boost the economy needs. This in turn will make it difficult to reach the growth target achieved by the government.
More than the difficulty in meeting the revenue target, the government will find it more difficult in meeting the expenditure target.
The FM has grossly under provided for expenditures like fuel and fertiliser subsidies. In an environment where international oil prices are expected to move higher, the provision of Rs40,000 crore is completely inadequate, especially since diesel subsidy in the current year itself is Rs80,000 crore. Given the political compulsion and the state of the economy, it will be very difficult for the government to hike the fuel rates.
A lower provision for food subsidy is also politically not possible at a time when the FM’s party has performed miserably in the elections and the Mahatma Gandhi National Rural Employment Guarantee Act and the food bill are considered by the high command as absolutely essential for political survival.
Mr Mukherjee has also provided for only Rs16,000 crore for capitalising banks, in a year when the SBI alone would need that amount, even if we assume that this year’s promise of Rs7,900 crore will be provided.
The FM has also taken credit of Rs40,000 crore from the telecommunications ( telecom) auctions. This, at a time when it has to pay Rs10,000 crore as refunds to the existing telecom companies as per the Supreme Court’s ruling on the 2G scam. Further, with most of the companies ridden with high levels of debt and the poor response of 3G roaming, it will be very difficult to meet the target.
Though these events will be forgotten by the market over the next couple of days as Europe and the inflow of liquidity takes centre-stage, what will not be forgotten are the changes made by the FM in Section 9 of the Companies Act which affects all foreign direct investments ( FDIs) in the country since 1962. The draconian law has the potential of virtually freezing FDI flow in the country as companies would now be jittery in investing in a country where laws are changed on a retrospective basis. Irrespective of the difficulty in implementing this provision, the fact that such an act has been done will be enough to scare investors.
Unfortunately, Mr Mukherjee will not be remembered for all the good things he has done of late in keeping this government intact, but will always be cursed for introducing a change with a retrospective effect.
....more info