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The forthcoming Budget would be a “responsible budget” for both the economy and stock market out of sheer compulsions.
If the Government passes a populist Budget, the scare of rating downgrades would be back and that would lead to outflow of investments by FIIs, which in turn would set off a vicious cycle of severe fall in domestic equity markets, significant depreciation of rupee, steep rise in oil and fertilizer subsidies, and so on.
In the current fiscal, while goods exports are stagnating, net FDI inflow (net of outbound FDI) is expected to be negative, service export growth is substantially lower and import of crude oil and gold remains unabated, the Government cannot afford to have a populist budget.
Hence, this budget should address issues of containing twin deficits (fiscal and current account deficits) and also stagnation in the industrial economy.
As gross tax revenues are growing in single digits, the Government would come out with several fiscal measures without sacrificing any significant fiscal resources to augment the finances and also improve the condition of industrial economy.
It can increase the import duty on power equipment to help the domestic companies and increase the excide duty on diesel vehicles to reduce the overall burden arising from oil under-recovery.
Further, it can be expected to increase import duty again on gold and also the service tax rate by about 100 bps.It can also provide guidelines to cash-rich PSUs to declare special dividends and also a roadmap for the divestment of Hindustan Zinc and Balco, also shares held by SUUTI, an investment arm of erstwhile UTI – these last two sources alone can augment close to Rs 30,000 crore in FY2014.
The Budget can give boost to financial savings of households by giving tax benefits for investments in mutual funds and insurance.
For infrastructure development, it can allow large banks to issue tax-free infra bonds and refinancing of rupee debt by external commercial borrowings.
(The author is ED and CIO, Centrum Wealth Management Ltd.)
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