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Budget: Big reforms pushed out

By Akash Prakash
February 27, 2010 14:59 IST
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The government has to realise that at some stage it will have to deliver on big ticket items, says Akash Prakash.

The Budget presented by the finance minister on Friday was notable in that there were no nasty surprises, and a grateful market responded (largely through short covering) by rising upwards of 1.25 percent. Market expectations were obviously muted, and the FM managed to satisfy these low expectations.

First of all, on the positive side, the FM began his speech by talking about the need to concentrate on social sector spending and create an enabling environment for growth without getting involved in every sector. This is an usually clear and forthright statement from this government.

The FM also took on the issue of PSU disinvestment directly, budgeting for a revenue mop-up of Rs 40,000 crore (Rs 400 billion) from divestment and talking about the advantages of selling government stakes in these companies.

This is again a far more direct approach and there no longer seems to be any need for apologies on this count. The willingness of the government to accept the 13th Finance Commission recommendations on the targets and transparency of approach towards fiscal consolidation is another positive.

The desire to move to a fiscal deficit target of 4.1 per cent by FY 2013, and hopefully 3 percent by 2014 are all good. The willingness to accept a public debt/GDP target is again a sea change.

The clear statement that the government will not issue fertiliser or oil bonds and pay all subsidies in cash is positive for companies in these sectors and also ensures transparency in the fiscal calculations.

The ability of the FM to hit the 5.5 percent fiscal target in 2011 has also cheered the market as has the lower net market borrowing target of Rs 345,000 crore (at least Rs 25-30,000 crore below market expectation).

The FM must also be commended for using quite credible macro targets. It looks as if the budget document is using nominal GDP growth estimates of about 13 percent and net tax revenue growth of 15 percent, both of which look quite believable.

Expenditure is also moving in the right direction, with a strong 15 percent plus growth in plan expenditure and only 6 percent growth in non-plan, though one can question the government's ability to hold total spending at just 8.5 per cent.

The recasting of tax slabs so as to leave an additional Rs 25,000-30,000 crore (Rs 250-300 billion) in the hands of the middle class is another huge boost to urban consumer sentiment and helps consumption.

The hike in MAT to 18 percent is, to my mind, a positive as it will force us closer to the DTC ideal of a low rate of tax which every company has to pay, with limited exemptions. The excise rollback of only 2 percent is also a positive surprise to the markets.

Other associated reforms like the move to auction coal blocks and have a coal regulator, the seeming willingness to open up new bank licences to the private sector, incentives for legal reform are major positives.

The problem I have with the budget is it is again a case of reforms pushed out. The FM has managed to bring the fiscal deficit down to 5.5 percent of GDP from 6.9 percent, despite only a net Rs 20,000 crore (Rs 200 billion) incremental incidence of taxation.

The budget maths relies heavily on being able to keep expenditure growth under control at 8.6 percent, and being able to raise Rs 75,000 crore (Rs 750 billion) from disinvestment and 3G auctions, neither of which is fully under government control.

The only real revenue-raising measure is the hike in duties on petro-products, which is invariably going to be inflationary. In fact, the bond markets, after initially gaining on the lower borrowing programme for 2011, gave back all the gains as the inflationary consequences of the fuel hikes sank in.

Real structural changes on the expenditure side are still not in sight. There was no movement on the Kirit Parikh report, no further details on the nutrient-based scheme for fertilisers and no movement on targeting food subsidies. The fiscal remains very vulnerable to any serious spike in crude prices.

Can we really continue to keep total expenditure growth at sub 9 percent beyond 2011, with the Right to Food Bill and the Right to Education Bill costs still to enter the budget arithmetic?

Both the major revenue reforms, the GST and DTC will happen only in 2011-12. There was also no further clarity on what will actually go into the direct tax code, or the expected rates to be adopted for GST. One can only hope that the government manages to convince the states to accept the finance commission's view of a single rate with limited exemptions.

The unfortunate tendency to micro manage on the tax side continues, with micro-level changes in sector specific tax rates and exemptions. The budget has the big positive of being committed to the fiscal targets of the 13th Finance Commission and the FM deserves full marks for that. Investors both local and international will applaud the targets outlined, but the details of how we will get there are still not clear.

In terms of key reforms still to be implemented like GST/DTC and subsidy rationalisation, the hard decisions are still ahead of us. Markets are for the moment happy with the fiscal targets outlined, but will eventually start focusing on how we reach these targets.

If one is willing to give the government the benefit of the doubt, then one can say that the details on both the expenditure and revenue side will become clearer over the coming 12 months.

On the whole, not a bad effort as it has given the government a little more breathing time to implement some of the more difficult structural reforms. However the government has to realise that at some stage it will have to deliver on these big ticket items. The market will not accept mere targets without credible action forever.

Akash Prakash is the Founder and CEO, Amansa Capital.

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