Good attempt at providing fiscal stimulus

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: The key theme underlining the 2008-09 Budget is to provide fillip to the growth process and make it “faster and more inclusive”. The impetus is likely to come primarily from a boost in consumption activity across the social spectrum which is likely to create investment demand and spur growth.The stimulus to the industrial sector, in the form of excise duty cuts, to pharmaceuticals, automobiles and few mass consumption items will help invigorate consumption demand for these sectors. This is important, especially when the automobile sector, as also some of the other consumer durables, have been seeing a moderation in production, sales and credit offtake.

On the other hand, special emphasis has been given towards supporting demand in the rural economy as well. The increased allocation to agriculture and rural development is expected to generate interlinkage effects and work towards broadening the consumption base. With increased emphasis on education and health in the 11th five-year plan, the allocation to both the sectors has gone up by around 20%. All these proposals will not only provide short-term fillip to the growth process but also help in creating long-term capacity.

For a continued growth in investment and capacity creation, the government has agreed to provide equity and loan support to Central Public Sector Enterprises. An increase in the corpus of Rural Infrastructure Development Fund, higher allocation for the Department of Information Technology and the establishment of a non-profit organisation to promote skill development will go a step further to help India achieve an “inclusive” investment growth.A more than 15% increase in plan expenditure has come alongside a welcome change in direct tax slabs and rates. Although these changes might look marginal on the face of it, the overall aggregate impact can be quite significant.

An environment of sustainable growth, with consumption being a primary driver, will be a positive for the financial sector. Also we understand that the government will compensate the loan waiver of Rs 600 billion of non-performing loans of marginal farmers, over the course of the next 3 years. This could potentially release funds for more productive activities and help promote growth. It is also heartening to note that the banking cash transaction tax has been withdrawn and the anomaly of double taxation of the dividend distribution tax in the hands of both the parent company and the subsidiary has been removed. However, the increase in the short-term capital gains tax might leave a sour taste in the mouth of players in the equity market.In providing the fiscal stimulus, the finance ministry hasn’t compromised on fiscal consolidation and the process is likely to remain on track in FY09 as well with the fiscal deficit expected to inch lower to Rs1.33 trillion taking the fiscal deficit to GDP ratio to 2.5%, much lower than the FRBM target of 3% earlier set for 2008-09.Although the budget refrains from taking any major initiatives to carry the reform process forward, a good attempt has been made to provide fiscal stimulus to the economy.