The Hindu Business Line : Bigger shopping bags

THE reform-oriented budget will boost economic growth, though it falls short of the Government's promise on substantial improvement in the fiscal deficit.

On balance, the budget operates within the ruling coalition's political constraints, and the Finance Minister seems to have favoured easing taxes and reforming the tax structure to boost economic growth rather than be dogmatic about fiscal consolidation.

There were relatively few tax hikes, but the favourable tax changes come at the expense of the Government missing the fiscal targets for 2005-06, as required by the Fiscal Responsibility and Budget Management (FRBM) Act.

While the fiscal deficit/GDP ratio will be lower next year, the decline is less than what the FRBM mandates.

Still, it is encouraging that the trend towards fiscal improvement remains intact.

The budget positively impacts individuals and businesses, and the cut in import duties, especially on capital goods, will further improve manufacturing competitiveness.

The changes in the income brackets for personal tax will likely boost disposable income, and further strengthen the ongoing consumption boom.

JP Morgan will probably raise its full-year GDP growth forecast for 2005-06 to 7 per cent from 6.5 per cent, owing to measures that promise to boost investment spending and disposable incomes.

Also, the slow improvement in fiscal deficit will be marginally positive for economic growth. The reduction in several import and excise duties is positive for the inflation outlook, despite the increased cess on fuel to fund road projects.

Although, the budget deficit is likely to narrow, the revenue deficit will remain unchanged in 2005-06. However, note that unlike last year, this budget does not include privatisation receipts.

Also, the budget is impacted by the recommendations of the 12th Finance Commission that were announced after the FRBM targets were set.

It is perhaps understandable that the Government is likely to miss the FRBM target for 2005-06.

Overall, the Government's forecast for total receipts appears broadly achievable.

The Government announced a higher-than-expected borrowing target of Rs 1.1 trillion. The bond markets may despair, triggering further weakness in interest rate markets.

Further, due to the constraint from the existing stock of debt, fresh borrowings are likely to be concentrated in longer maturities, which, along with the ongoing trend of reallocating portfolios away from government bonds and a hawkish RBI stance, will tend to steepen the yield curve.

In addition, there are sector-specific measures which show the Government's commitment to reform: in the financial sector, the budget proposes amendment of the Banking Regulation Act and the consolidation of weak cooperative banks; the government will consider FDI increase in sectors like mining, trade and pension; and lower import duties will improve competitiveness.

Overall, the budget will be positive for the economy and the equity markets.

The growth-impetus will enhance India's attractiveness as an investment destination, and along with the relaxation in FDI norms, could accelerate capital inflows in the coming weeks.

(The author is Managing Director — Senior Country Officer India & Srilanka, JP Morgan Chase Bank)

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