Sucheta Dalal :A turn to the right
Sucheta Dalal

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A turn to the right  

February 26, 2010

Winds of change are blowing over the Indian economy, if this year’s General Budget is anything to go by. The traditionally circumspect and left-of-Centre Congress government looks to have shed its recent mentality of restraint and caution in favour of a more pragmatic and aggressive approach towards putting India on the fast track to economic prosperity.

In one single swoop, the government has introduced several positives that will ostensibly give its growth prospects a much needed shot in the arm. Take for instance the government’s surprise move to provide banking licences to several more private players and non-banking finance companies (NBFCs). For almost a decade, there have been no additions to the Indian banking industry. This announcement clearly manifests the government’s plans of liberalisation and privatisation. By opening up the banking sector to NBFCs, the government has put into motion the idea of having a competitive and thriving banking system.

In another welcome move, the government has sounded the horn on opening up India’s retail sector. This subject has seen much debate in Parliament, with certain sections arguing that it would effectively kill the unorganised segment in India. But the fact is that foreign direct investment (FDI) in retail will bring with it several advantages to the sector. The government wants to push it to help in bringing down the considerable difference between farm gate, wholesale and retail prices.

A surprise announcement was the radical shift in the direct tax policy. With a healthy revision in tax slabs, the Budget has given a significant boost to the disposable income of the aam salaried aadmi. The finance minister has effectively given a licence to the Indian consumer to go out and spend, if not splurge. The government possibly envisages an economy which is much more consumption- and investment-oriented than today. Indeed, the fatter wallets are likely to entice people into putting more money into various investment vehicles—even risky assets hitherto considered unworthy of any attention. This bodes well for the economy as a whole.

“The benefit provided to individuals by enlarging the tax slabs has resulted in a tax payer with a taxable income of Rs5 lakh–8 lakh gaining as much as 35%–37%.  This coupled with additional investment opportunity of Rs20,000 in infrastructure bonds will provide further savings on tax to the tax-payer and a boost to savings in the economy,” says Dr Suresh Surana, founder, RSM Astute Group.

On the divestment front too, the government looks set to unlock more value from State-run enterprises. With a reasonable divestment target of Rs25,000 crore for the next year, the Budget has made good the government’s commitment to put the disinvestment wheels into motion.

To speed up the reforms process in the financial services sector, government announced its intention to set up a Financial Services Legislative Reforms Committee. It is indicative of the government’s sense of urgency in introducing effective reforms in the sector. “The proposal will bring more focus and speed up the reform process. This will certainly help the entire financial sector, including insurance, and lay down a strong foundation for growth,” says TR Ramachandran, CEO & MD, Aviva India.

The government has also rightly put greater emphasis on the rural and agricultural sector in this Budget. With several positive initiatives in areas of agri-production and extension of credit support to farmers, the government has acknowledged the important role of the rural economy in carrying growth forward. Rural consumption will play a crucial role in supporting industrial growth.

For the small and medium enterprises (SMEs), the Budget will evoke mixed reactions. “From an overall perspective, the Budget is good for Indian industry and also for SME sector. The SMEs which are paying corporate tax will get relief, as they will pay lower surcharge of 7.5% on their tax liabilities, but the burden of Minimum Alternate Tax (MAT) will go up to 18% from 15% from April 1, in case the companies are paying tax under MAT,” says Manish Bang, director, Expanza Access Ltd.

With this Budget, the government has found the right balance between supportive growth and fiscal prudence. It has initiated several reforms at a crucial time, while keeping the fiscal deficit in check. That is a commendable effort. Chanda Kocchar, managing director and CEO of ICICI Bank, says, “The overall focus of the government on improving its fiscal position and increasing fiscal transparency is highly commendable. The finance minister has announced medium-term targets for the fiscal deficit, with the fiscal deficit targeted at 4.1% in FY2013. At the same time, he has articulated bringing items like oil and fertiliser subsidies, so far considered as off-balance sheet items, into direct fiscal computation. This movement towards better fiscal management and transparency will increase efficiency in the economy, improve India’s attractiveness as an investment destination and provide the government greater fiscal flexibility to deal with any future economic shocks.”

Indeed, the Manmohan Singh-led government has come a full circle since its game-changing policy initiatives of the early nineties. Following in the prime minister’s footsteps, finance minister Pranab Mukherjee too seems to have finally arrived on the scene, after more than three decades with the party. The fact that this is only the second year of his new five-year term at the helm of Indian affairs is a heartening indicator of things to come. — Debashis Basu and Sanket Dhanorkar

-- Sucheta Dalal