Initiate a few bold reform measures

There are two hard facts about the domestic economy at this juncture. One, we are pushed to a situation where we need steady increase in inflow of FII investments — and a robust inflow of FDI — to finance growing current account deficits. Two, the industrial economy has decelerated significantly. The government has to address both these issues seriously.

As there are no more major elections till early 2014, and the fact that the next Budget in 2013 would most likely be focused on welfare schemes, with an eye on the General Elections to the Lok Sabha in 2014, this is the last chance for the present government to implement effective economic measures to address these two issues.

We expect the Budget to dole out concessions on STT and also make commitments on a few bold economic reform measures to boost sentiment in the stock market and thereby maintain the current momentum in FII inflows.

We expect firm commitments on FDI in multi-brand retail and aviation, divestment of mid-cap PSUs and further relaxation for investments in debt instruments by the FIIs.

These measures would provide a significant boost to the equity market.

Tax revenues

For industry, the measures could be mixed. However, we expect the net effect of Budget measures to be positive for the overall industrial sector.

Considering the fiscal conditions, the government might increase duty on cigarettes and diesel cars selectively and may also resort to a 200 bps hike in excise duty on select industries, which remain relatively not impacted significantly by the current deceleration instead of an across-the-board 200 bps rise in excise duty on the entire manufacturing sector.

As the service sector GDP continues to grow at impressive rate of over 9 per cent and its share of total tax revenues is just around 10 per cent as against over 60 per cent share in overall GDP, the budget would focus more on service sector for improving its overall tax revenues.

The entire service sector baring 25 to 30 service activities is likely to be brought under the negative list or the coverage of services could be expanded vastly.

This strategy would leave the manufacturing sector least impacted.

On industrial front two major issues, falling capital expenditures and shortage of fuels (coal, crude oil and gas), are impacting the economy severely.

We expect major boost to the infra sector in terms of significant concessions for the investments by individuals, corporate and the FIIs. We also expect complete removal of import duty on coal and gas to make all these core fuels available cheaply to the core sectors like power, steel, etc.

Power boost

Considering the need to set up over 75,000 MW of power generation capacity during the Twelfth Plan period, we expect the extension of tax holiday for the power generators and distributors for another 15-20 years.

For domestic power equipment producers, we also expect some protection in terms of significant rise in import duty on power equipment.

As the aviation industry, the back bone of India's service sector, is going through a financial crisis, we expect aviation turbine fuel to be classified as a ‘declared goods' to avoid duplication of duties by State governments.

Encourage investmentS

As the fertiliser subsidy bill is growing rapidly and there has been no major greenfield project in the last 13 years, we expect some fiscal concessions to encourage new capacities.

Overall, while the service sector and a select few manufacturing industries may face the impact of rise in taxes, the manufacturing sector ought to get major fiscal benefits to boost the capital outlays.

We firmly expect the stock market to go up significantly post-Budget due to the anticipated boost to industry's capex plans, major concessions for the both retail and foreign investors and by expressing firm commitments on major economic reform measures.

(The author is Director and Chief Investment Officer, Centrum Wealth Management.)

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