The Budget has come at a time when the global economy is showing some signs of recovery and it is imperative for the government to increase public spending in such a scenario. The three fiscal stimulus packages announced so far have started showing results in the domestic economy.
The growth rate of 6.7% in GDP has made India the second fastest growing economy in the world during 2008-09.The fiscal measures taken by the government to counter the global slowdown have resulted in a shortfall in revenues and substantial increase in government spending, leading to a deviation from the FRBM target for 2008-09 and 2009-10. The overriding effort in this budget seems to have been to restrict the rise in fiscal deficit without sacrificing much growth.
The Budget has attempted to strike a balance between expectations of acceleration in infrastructure creation and constraints imposed by the high deficit and contraction in tax receipts. The focus continues to remain on stimulating economic growth in spite of deterioration on the fiscal front.
But the market did not react positively to the proposals announced by the finance minister as the benchmark 30-share Sensex dropped 870 points from last Friday?s close. Also, there was no mention of reforms in petroleum and insurance sectors, and pushing ahead of the divestment programme. Given the stability of the government this time around, it is surprising that not more has been done to raise resources through disinvestment.
The markets may take time to appreciate the stimulus provided to consumption by increasing allocation to targeted programmes such as NREGS and removal of surcharge on personal income tax. The tax incentives would be good for several sectors such as consumer durables and non-durables and pharmaceuticals.
The Centre?s tax-GDP ratio has increased by 2.3% points to 11.5% in 2008-09 from 9.2% in 2003-04. The direct tax-GDP ratio has increased by 2.6% points to 6.4% in 2008-09 from 3.8% in 2003-04. The Budget envisages that the medium-term strategy for direct taxes is to consolidate the achievements of the past and accelerate it further. As a measure to partly neutralise the erosion in tax base, the government increased the Minimum Alternate Tax rate to 15% from 10%now.
?The increase in MAT is a bit of a concern as it could impact current cash flow for companies. Although, as we have come out of tax holiday and the effective tax rate increases, this increase in MAT could eventually offset higher taxes in future years,? says Sudip Nandy, CEO, Aricent.
While the short-term term proposals in the Budget are focused on economic revival, industry expected a clear roadmap on containing the fiscal deficit. The high fiscal deficit can become a potential bottleneck and in the medium-term monetary policy may have to be appropriately adjusted.