Lull after the storm?

The decisive political mandate provided an opportunity to the finance minister to push hard on the reform pedal. The swiftness with which government adjusted petroleum prices just a few days before the Budget further bolstered the optimism on prospects of fresh reform measures. So some concrete announcements on relaxing FDI limits, disinvestment and pension reforms were expected. The Budget clearly did not live up to those expectations. But that does not rule out these reforms being carried out in the near term.

As the economic downturn is expected to continue through 2009-10, further fiscal stimulus was a necessity. So the fiscal deficit at 6.8 per cent of GDP, while being on the higher side, does not come as a surprise. The GDP growth assumption and revenue targets set in the Budget are quite realistic. If government sticks to its expenditure targets, fiscal deficit could be contained within the budgeted limits. What did come as a disappointment on the fiscal front was absence of announcement of measures for ensuring medium term sustainability. We will have to wait till October for the new FRBMA.

 

An appropriate measure on the direct tax front has been removal of 10 per cent surcharge on personal income tax, which had been in existence all through the boom years when it pinched the least. Apart from giving the signal that surcharge was indeed temporary in nature, its removal will also act as a countercyclical measure by boosting private consumption. Other positive moves have been removal of FBT and CTT and introduction of nutrient-based subsidy for fertilisers.

Dharmakirti Joshi
Director and Principal Economist,
Crisil