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Friday, Jul 09, 2004

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Striking a balance

Sunil Duggal

The benefits extended towards strengthening the rural economy will help boost disposable income and generate more demand. This may take time to show up in the balance sheets of the companies.

THE Finance Minister has managed to withstand the demands of a coalition government and presented the Budget on the expected lines of being pro-farmer and pro-poor.

Mr Chidambaram had little time for this year's Budget but he has managed to maintain a fine balance between the politics and the economics of a coalition government, which, one must realise, also has the Left as a key element.

The focus of the Budget clearly was on strengthening the rural economy by extending various packages to farmers and the farm sector — such as doubling the agri credit limit in the next three years and extending exemptions to procure tractors — in addition to providing basic amenities such as health, education and water to a larger section of the population.

Though schemes promising health, water and education have been there for many years in various forms and under various names, the key to get the desired results is proper ground-level execution which needs stringent monitoring. This is good news for the FMCG industry in general.

For most FMCG companies, rural franchise forms a large (or even the largest) part of their consumer base.

The benefits extended towards strengthening the rural economy will certainly help boost disposable income and generate more demand. This may take time to show up in the balance sheets of the companies but the effect will certainly be positive.

Coupled with what appears to be a good monsoon, this will probably provide the trigger that awakens this industry from its long slumber. The imposition of VAT is a welcome move and will ensure higher transparency in tax collection and higher revenues.

However, the Government should ensure that the VAT rate should not exceed the present effective sales tax rate applicable to the industry as this will impose a high burden on the corporate sector and the consumer.

The Finance Minister's moves to increase service tax and levy a 2 per cent cess on all taxes was inevitable considering the Budget had made provisions to undertake many social projects which would require significant budgetary support.

This will certainly have a negative, though marginal, impact on the companies as it will increase their tax outgo.

The relaxation of foreign investment limits in Civil Aviation, Insurance and Telecom sends the right signals of the Government continuing with the reform process and will certainly boost investments in these sectors, especially Civil Aviation which is far from being world-class.

However, the Finance Minister's announcement of using disinvestments as a tool that will be selectively deployed for ailing PSUs dilutes the momentum of reforms.

(The author is CEO, Dabur India Ltd.)

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