Indian equities have taken a breather since mid January 2013 as market participants ponder over the outcome of the Union Budget. We take it as a foregone conclusion that the Finance Minister will deliver a reform-centric
Budget addressing the fiscal and current account deficits in the wake of the sustained country downgrade scare. In our opinion, the FM cannot even afford a Budget which is termed as a non-event, leave alone a bad one.
During the last Budget, the then Finance Minister Pranab Mukherjee had quoted Hamlet saying: I must be cruel only to be kind. Chidambaram, who usually quotes the Tamil saint Tiruvalluvar in his Budget speeches, would want to serve customary populist carrots to appease the critical vote bank ahead of the forthcoming elections but, his Budget, by and large, is likely to be balanced, certainly devoid of any ambiguous provisions to help maintain investor confidence as also to attract foreign capital.
First and foremost, the FM will try and achieve the fiscal deficit target of 5.3% that he had promised for 2012-13. He is likely to succeed in getting close primarily through tighter expenditure control and higher PSU dividends that may offset to an extent, slippage in tax collections, lukewarm spectrum response and spillage in unrealistic subsidy targets set by his predecessor. Already, we have heard of tight spend controls imposed across ministries in the last few months.
Next, the FM would want to keep his promise of fixing fiscal deficit at 4.8% next year. If one looks at the India Inc statement of account, all revenue earned by the government goes towards fulfilling non-plan expenditure and consequently we run a fiscal deficit that equals the size of our plan expenditure.
This is the result of wasteful and unchecked spending over the years and the noose has been tightening.
It's obvious the FM can't reduce fiscal deficit significantly solely through revenue boost. We expect a massive expenditure control in this Budget. The FM is likely to provide for no growth or only a marginal rise in expenditure.
This will be a major move, which should excite the market and make the deficit target look achievable. Apart from the flagship schemes like the NREGA, many centrally-sponsored schemes are likely to be given lower allocations or abandoned altogether.
Subsidy of course, cannot be reduced in the current scheme of things, but reducing wastage will be attempted through direct transfers, and over time, by deregulating fuel prices.
To make up for the fuel subsidy, we expect additional duty on diesel vehicles. Interest subsidy to farmers and raising purchase limit for housing to Rs30 lacs from Rs25 lacs may be popular moves from the election perspective; so also Food Security Bill, access to medicines through higher allocations and substantial rise in agriculture allocations. Sops are also likely to help boost exports and aid the current account deficit cause.
On the direct taxation front, we expect no change in personal income tax and corporate tax rates, given the prevailing mood. The FM too, hinted at stable rates at a recent investor seminar. Perhaps, he would impose a surcharge, for the higher tax brackets in particular, in line with the philosophy to tax the rich.
Contrary to popular opinion, we doubt the FM would increase exemption slabs beyond Rs2 lacs. For one, the DTC recommends a limit of Rs2 lacs and more importantly, enhanced tax collection is critical given the reigning deficit. In this pressure scenario, an exemption of say Rs2.5-3 lacs will help many people escape the tax net. The FM simply cannot afford this potential loss.
With Mumbai and Delhi contributing 50% of the country's income tax collections, our tax base needs to be seriously widened both to boost nation-wide collections and those from hitherto untapped sources. An amnesty scheme could be one good way to boost tax collection.
Source : economictimes.indiatimes.com