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The Budget 2009-10 has focused on consumption and inclusive growth. It has clearly tried to put higher quantum of money in the hands of the consumer by increasing spending and cutting taxes.
Fringe benefit tax:
Abolishment of fringe benefit tax (FBT) and surcharge on income tax will help the common man. Introduction of good and services tax (GST) by April 1, 2010 will also help in blocking the tax leakage and reduce regulatory arbitrage between unorganized and organized sector.
The increase in spending power of the consumer is expected to help reinstate economic momentum. The government has substantially stepped up spending on the social sectors clearly emphasizing the stance on inclusive growth through measures such as reducing poverty by 2014, additional job creation of 12million, welfare spending on schemes such National Rural Employment Guarantee Scheme (NREGS), rural infrastructure, Bharat Nirman, Union Identification Authority of India, education, health and infrastructure growth. If this spending is directed wisely towards deserving candidates, it will certainly have a major positive long term impact on the economy and the market. On the sectoral front, adequate support has been provided to sectors like exports, textiles etc. As expected the focus and thrust on infrastructure development continued in this budget.
The equity market reacted adversely due to the lack of big bang announcements such as enhanced foreign direct investment (FDI) limits, divestments and fiscal discipline. Aggressive divestment expectation and immediate steps to realign the fiscal scenario not being met have also led to short term market disappointment. The adverse reaction of the market was also triggered by the increase in minimum alternate tax (MAT).
Government borrowing
From the government borrowing standpoint, the borrowing programme is higher than the market expectation. However, the divestment receipts can lower the borrowing programme reasonably. In the future, the market will closely observe the steps taken by the government outside the budget in areas like divestment, fiscal management and FDI participation for determining future growth direction. Efficient execution will become critical driver for the economy and the market going forward.
Though the market was euphoric in its expectations, it is important to remember that reforms cannot happen overnight and will be spread over a period of time. Net-net, as the Honorable Finance Minister has pointed out that Union Budget is not the only suitable forum to announce sweeping reforms, which should provide comfort to the investors that the reforms are definitely on the radar, given the fact that government has expressed intention to re-visit the same.
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