FM has growth & rural India on his mind: Chaturvedi

This year's Budget was prepared in the context of a rapidly growing economy, a booming stock market, expectations of increase in inflation and interest rates as well as continued worries on the current account deficit with high oil prices. Hence, the amount of elbow room available to the policymakers in the area of fiscal changes has been limited. Though the budgeted revenue and fiscal deficit are well under control respectively, the current account deficit will play on the minds of policy planners and investors. In one sentence it is an inclusive growth oriented Budget with a focus on the rural economy.

One noteworthy thing about the Budget from the eyes of an international investor is the confidence in the fiscal consolidation capability of the economy.  It would have been difficult to imagine a situation where tax as a percentage of GDP goes up for 3 years running, while the fiscal deficit comes down correspondingly in these years. Similarly, the borrowing programme of the Government has progressively been moderated. All these would send strong signals that even on the back of a popular democracy and a coalition Government, significant fiscal consolidation has been effected.

The Budget was expected to pay special attention towards employment generation.Employment generating sectors such as automobile, textile, pharmaceuticals, chemicals, have been given benefits. Similarly, rural non-farm employment generation and infrastructure and irrigation are focus areas.

The focus on rural infrastructure, health education, etc. is a very positive part of this Budget. Today, the urban consumption boom is really a function of several steps taken earlier in the area of economic liberalisation and improvements in urban infrastructure. Similarly, the current steps being taken can lead to an upsurge in demand in rural areas, some of which is already being witnessed and can put the Indian economy, on a long term trajectory of high growth rates.

One of the critical reasons why India has attracted significant international fund flows over the last year, has been the expectation of this continued growth of the Indian economy and the Indian stock markets. It is widely expected that the growth of the Indian economy will exceed that of other developed economies and also some emerging markets over the next few years.

For continued economic growth, quality infrastructure is a key requirement.  It is a well-known fact that India's infrastructure lags behind comparable economies by a significant margin. Hence, even though the Budget may not be the appropriate detailed policy response platform for this area, some indications of how this huge problem is going to be tackled in the future, were expected to be addressed. In the past, policy statement with respect to infrastructure development (including the formation of IDFC) has been made in the Budget. However, the effectiveness of these remains in question. The market yet eagerly awaits steps towards a more effective response, through a mix of policy and fiscal measures. Specific sectors like telecom, power, road transportation and ports will be in focus.

Along the same lines with significant FII flows coming into the country and lack of supply of additional quality paper in the market, there seems to be an asset price inflation in equities. The stage seems set for enabling some of this appetite for Indian equity paper to come directly in the area of asset creation, either through the FDI route or by enabling special purpose vehicles, SPV.No specific policy response was evident in this area.

On a more sector specific basis, the cut in excise duty on small cars from 24% to 16% will boost demand and will be positive for automobile companies. Similarly for banks, the tax break on interest earned on long-term bank deposits is a marginal positive, whereas the significant boost expected towards spending in core areas could benefit banks in the long term. Similarly, the enhanced liquidity availability of larger limits both in the area of government securities and corporate bonds for overseas investment would benefit the banking sector as a whole.Rising MAT rates from 7.5% to 10% may result in some earnings downgrade for companies who are subjected to MAT.Power sector got a lot of focus and investments proposed here will benefit companies in this industry.Companies are likely to benefit given the significant outlay for development of rural infrastructure, health and education programmes.

For mutual funds, the enhanced liberalisation in investing overseas both in ETFs and in stocks is a significant positive, and takes the industry one step forward towards integrating with the global markets.Similarly, the fiscal consolidation and the concomitant enhanced investor confidence is likely to benefit the industry.The participation by mutual funds in the NDSOM system will enhance the overall efficiency of the G-Sec market. Higher Securities Transaction Tax (STT) is likely to be a temporary dampener on market sentiment, but if the fundamental positives in the economy continue to play out, this will get overlooked in the medium term.

All in all, the Budget reflects the buoyant mood of the economy and the need to carry forward more of the same.However, reforms in certain critical areas like labour law reform, FBT rationalisation and concrete steps towards infrastructure development, especially in the power sector may have to wait for another day.

Budget is increasingly now being seen more as a statement of accounts with a sprinkling of some policy measures and lip service to various political constituencies of the Government, rather than an important path-breaking policy statement opportunity. This has reduced the uncertainity and magnitude of expectations from the Budgets.Yet it remains the one single opportunity for the Government to indicate how the country's finances and its fiscal situation will evolve over the coming year, and what steps it will take to meet the emerging economic challenges in the future. 

Many of the reform programme related areas are now increasingly dealt with outside the Budget because it reduces the political uncertainity surrounding these measures.This process is likely to continue and we will increasingly see the Budget reflecting the political reality of the day and more of a statement of accounts, rather than an a vision framework of economic policy.

The author is Ved Prakash Chaturvedi, Managing Director, Tata Asset Management Ltd.

Also read -

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• Budget '06 - Mutual Fund Wish list
• Budget to focus on employment generation: Chaturvedi