For optimism in the economy

INTERIM BUDGET & THE ECONOMY/COMMENT

K V Kamath,
Managing Director & CEO
ICICI BANK

The interim Budget seeks to continue the policy focus on services sector growth, infrastructure development and an economic environment that enables and stimulates industrial activity.

The Budget takes important steps in sustaining the optimism and enthusiasm in the economy. The removal of service tax on outsourcing to India by foreign companies is welcome.

It has also placed the much-needed emphasis on infrastructure. The move to extend fiscal benefits to new projects in the power sector complements the measures already taken to revitalise this critical sector.

The focus on business and transport infrastructure will enhance India's image as a business and tourist destination and stimulate economic activity.

Importantly, the Budget focuses on public-private partnerships, which is a sustainable and efficient model for infrastructure development.

The budget highlights the sound macroeconomic fundamentals and the growth momentum in the economy. The outlook on the fiscal deficit, at 4.8 per cent for the current year and 4.4 per cent for the next year, is a key positive factor. The Budget continues with a programme of policy measures to leverage India's strengths and realise its potential.

Keki Mistry,
Managing Director, HDFC

A fine balance

Following the finance minister's previous slew of measures, the interim Budget forms the trilogy of the continuing feel-good factor for the Indian economy.

Though the finance minister did tilt towards the political compulsions of presenting a populist Budget, he announced several positive measures too.

The decision to reduce stamp duty on instruments within the jurisdiction of the Central government is a positive step and should set a precedent for state governments to follow.

The extension of the long-term capital gains tax break for three years should, in the long run, keep the equity markets buoyant.

Unfortunately, the sun-set clause for equity-oriented mutual funds was not extended. The tax measures for BPOs is a welcome step and will continue to make India an attractive destination for such business.

While it is inevitable to dole out freebies, especially in an election year, what appears worrisome is the pressure on public sector banks regarding agricultural loans.

Some of the measures are reminiscent of directed credit. The revival of the development finance institutions once again appears to be a bail-out package by the government.

Also, retaining interest rates on small savings at current levels is out of sync with prevailing interest rates. The surprise elements were the fiscal deficit numbers.

To conclude, within the limitations of an interim Budget, the finance minister seems to have struck a fine balance between continuing reform measures and creating the required environment for the ensuing elections.

R Ravimohan,
MD, CRISIL

No sweeping commitments

Barring the dearness allowance (DA) incorporation into Central Government employees' salary, no sweeping commitments of resources were announced in the interim Budget.

The fiscal deficit has been contained at 4.8 per cent of GDP, made possible by the buoyancy in tax collections, expanded base and cut in government expenditure.

Moot point, however, is what expenses were cut and whether development will suffer as a result. The FY05 estimate of fiscal deficit at 4.4 per cent of GDP is premised on a very optimistic industrial growth scenario, driving revenue buoyancy and expanding the GDP.

Assuming agriculture growth at its long-term trend of 3 per cent and services at 8.5 per cent, we get an optimistic assumption of industrial growth of 12 per cent for FY05.

The announcement incorporating 50 per cent of the DA of Central government employees into their basic salary may have implication on the finances of state governments as the latter will be forced to follow suit.

The announcements for the banking sector are more in the nature of indicative principles rather than concrete measures and their implementation will decide the eventual impact on the sector.