Budget: Boosting consumption

With economy back on track, FM partially reversed stimulus measures, laying the foundation for more growth.

The Budget got a huge endorsement from the markets. Though the surge in the indices around noon can partly be attributed to covering of short positions by traders, the Sensex (up 1.1 per cent) and Nifty (up 1.3 per cent) nevertheless ended the day on a positive note. Some experts attribute the gains as a welcome rally consequent to the pessimism that prevailed before the Budget and benign expectations post not-so-exciting Railway Budget announced on Wednesday.

The overall verdict on the Budget, however, is positive, given that it has addressed some key concerns and has struck a fine balance between stimulating economic growth and curtailing the government’s fiscal deficit. For instance, it has not only projected the fiscal deficit for 2010-11 to decline to 5.5 per cent of GDP (in line with expectations) as compared to an estimated 6.8 per cent for 2009-10, but also aims to bring it down further to 4.8 per cent in 2011-12 and 4.1 per cent by 2012-13. The lower government programme for 2010-11 also provides comfort (it should help ease the pressure on interest rates) and indicates that the corporate sector will not be crowded out of the debt market. Although the rise in excise duty by 200 basis points to 10 per cent, which is in line with the expectations of a partial rollback of stimulus provided in the last 18 months, and increase in duties on petrol and diesel, may prove to be inflationary, they will help shore up the government’s revenues. Broadly, these moves should lead to a benign interest rate environment, which is conducive for economic growth.

The hike in income-tax exemption limits, which will lead to tax savings of Rs 50,000 for individuals earning Rs 8 lakh per annum, was the biggest surprise and will provide more money in the hands of individuals, leading to higher consumption. Likewise, the increase in deduction (through investment of Rs 20,000 per annum in infrastructure bonds) under Sec 80C, along with the hike in allocation for infrastructure and, continued focus on rural and social schemes, should also have a positive impact on demand leading to higher economic growth. Not surprisingly, the Finance Minister has projected an 8.5 per cent GDP growth for 2010-11; more positive was the intent to achieve double-digit GDP growth in coming years.

Overall, the tone of the Budget was positive, which far outweighed the negatives. Not surprisingly, most market experts rank it at 8-9 on a scale of 10, and term the Budget as balanced and constructive in its approach to achieve high growth, while containing fiscal deficit. Also, even as there were no big-bang announcements, the Finance Minister chose to shun populist measures, which combined lent a feel-good factor.

In the medium-to-long-run, while the markets will see how these proposals get converted into action as well as continuity in the India growth story, expect the short-term market trend to be influenced by global cues.