Signalling reform

COMMENT: Sonal Varma, Vice-president and India Economist at Nomura

The government has used the Budget as a vehicle to signal its commitment to economic reform on oil price deregulation, the introduction of a goods and services tax from April 2010 and fiscal consolidation. However, with no clear-cut roadmap for disinvestment and price deregulation, the market has been disappointed.

The plan expenditure is likely to increase by 0.7 per cent of GDP with much of the higher allocation in the agriculture, education, health and rural development sectors. The abolition of the fringe benefits tax and commodity transaction tax is positive. The increase in personal income tax exemption limit could boost private consumption at the margin. Net tax revenue collections are budgeted to increase by 1.8 per cent y-o-y in FY10 with the assumption of nominal GDP growth of 10 per cent y-o-y in FY10. This appears to be fairly conservative.

The fiscal deficit target of 6.8 per cent of GDP does look realistic. In fact, as and when the government plans to divest its stake in public sector enterprises, and if higher growth accelerates revenue collections, the fiscal deficit could be lower and gross market borrowing could be lower than the budgeted Rs 4.5 lakh crore. However, the borrowing number is still substantial.