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Budget 2009-10: Past perfect, future tense - Views on News from Equitymaster
 
 
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  • Feb 16, 2009

    Budget 2009-10: Past perfect, future tense

    Conforming to the tradition of interim budgets being non-eventful in terms of policy actions, the acting Finance Minister Mr. Pranab Mukherjee presented the interim budget for the year 2009-10 today with very limited specifications about the government's future fiscal plans. It gave a detailed account of the outgoing government's performance for the previous four fiscals (FY05 - FY08) but had little to offer to Indian citizens and India Inc by way of fiscal incentives.

    Piggybacking on the past. Pushing present problems to the future.

    Choosing to rest on the laurels for the commendable economic performance during the initial four years of its tenure, the government's interim budget for 2009-10 was largely a reflection on the past. Without delving on the probable solutions for the present problems, particularly the poor fiscal situation, the budget in fact made more room for expansion of the non-planned expenditure allocation. Not throwing much light on specific policy measures to revive the economy, it indicated the possibility of ongoing monetary and fiscal measures to stimulate the economy, while temporarily relaxing the FRBM (Fiscal Responsibility and Budgetary Management) targets.

    Key takeaways

    1. The revised estimates pegged the government's gross tax collection in FY09 8.7% lower than the budgeted figures due to the recently announced fiscal stimulus packages.
    2. The revised revenue deficit has been estimated at 4.4% of GDP as against the budgeted figure of 1% of GDP while fiscal deficit is expected to go up from the budgeted 2.5% of GDP to 6% of GDP in FY09.
    3. For FY10, while the revenue deficit is estimated to come down to 4% of GDP, the fiscal deficit is expected to rest at 5.5% of GDP (without accounting for off balance sheet items).
    4. Offering some relief to export and employment oriented sectors, the budget extended the interest subvention of 2% on pre and post shipment credit for sectors such as textiles, leather, gems & jewellery etc. from March to September 2009, which would involve an additional outgo of Rs 5 bn.
    5. In order to sustain the health of the financial system, the government plans to recapitalise the public sector banks that are in need of capital to maintain capital adequacy ratio (CAR) in excess of 12% (as per the Basel II norms).
    6. Keeping in mind India's security needs, the budget increased allocation towards defence expenditure to Rs 1,417 bn. Also the major subsidies including food, fertiliser and petroleum have been estimated at Rs 956 bn (19% of estimated net tax revenue in FY10).
    7. Retaining the government's focus on rural infrastructure development, the budget proposed a corpus of Rs 140 bn for the same.

    What to expect?
    What clearly came out of the interim budget was that the government is not done with its borrowing programme and will have to continue to borrow heavily in the coming months to meet its expenditure plans. This is particularly in the wake of lower tax collections. Having said that, the yields on long term government papers are expected to remain under pressure, thus making it more expensive for corporates to raise long term money. While infrastructure funds will be partially taken care of by the refinancing of bank debt by Infrastructure Investment Finance Company Ltd. (IIFCL), India Inc. may have to defer the capex plans a little longer. Meanwhile, the softening of short term interest rates cannot be ruled out.

    Further, with the government being committed to revive the economic growth by undertaking more fiscal expenditures, allocation towards subsidies and higher wage payments are expected to put more money in the hands of people. This may bode well for Indian corporates in terms of stimulating higher demand for goods and services.

    In all, the interim budget set a cautionary tone to withstand difficult times.

     

     

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