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Budget: FM needs to do a balancing job
February, 20th 2010

The approaching date of the Union Budget 2010 has all the potential ingredients to make it an eventful occasion. The fact that this Budget is first such after the growth rebound of the Indian economy is not lost of the industry stalwarts.

And therefore, the upcoming union Budget assumes significance not just because it is the biggest annual policy event, but also because of its vital importance in determining the future pace of the Indian economy.

The upcoming Budget may be largely centered around the reintroduction of the fiscal prudence measures; while also ensuring that the demand buoyancy in the economy is maintained.

The high fiscal deficit of 6% and above, which has been incurred in the last two financial years, may see marginal curtailment. However, the actual quantum of the gilt supply may not taper off as yet.

In other words, the magnitude of the fiscal deficit may largely remain as it was in the previous year, but counting on the reinvigorated tax collection buoyancy, we may see some reduction in the fiscal deficit to GDP percentage.  Also, further activation of the divestment procedure to manage the deficit seems likely.

Another aspect of the Budget that may attract attention: is the policy willingness to continue with the indirect stimulus package to the industry. As per the estimates, the fiscal burden of the three-pronged package in the Dec 08-Mar 09 period accounted for nearly 1.8% of the GDP.

The continuation, or a more gradual withdrawal of this package, is what the industry has come to expect from the upcoming Budget. Lest it unduly hamper the demand cushion and upset the apple cart.

The tax rationalization too has been the long-standing demand of the industry. The groundwork for the introduction of the Goods & Services Tax in the forthcoming Budget will be a welcome initiative in an otherwise delayed implementation.

Added to that, further clarity in the implementation and the timeline of the new Direct Tax code is also an eagerly awaited Budgetary announcement. Albeit, the Exempt-Exempt-Tax approach of the proposed Direct tax code may have some deterring impact on the small investor, and may therefore require further tinkering.

In the same vein, further revaluation of the corporate tax and the minimum alternative tax rate too seems possible.

This is also the time to re-look at the entire subsidy regime viz, the fuel and fertilizer in particular. A roadmap for the gradual withdrawal of these subsidies and a more direct approach of reaching the important bottom of the pyramid constituents is the need of the day. 

From the mutual funds industry perspective, the presence of the inter-industry regulatory arbitrage has to be addressed. Moreover, it has been a long standing demand of the industry to accord Equity FoF schemes an evenhanded tax status with other diversified equity schemes.

Besides that, the Budgetary policy outlining of the FDI in the infrastructure and the education sector, may be a possibility. To add to which, the upcoming Budget may provide further road map on the 3G auction process.

In conclusion, it will require particular dexterity from the Finance Minster in ensuring social and economic development while managing the fiscal deficit. It is not just the year but the future at stake!

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