Union Budget – From a year of populist measures boosting consumption to a year of planned expenditure boosting investments

The market gave thumbs up to the Budget 2010-2011 with the Finance minister’s opening remark “We have weathered the crisis well and the Indian economy now is in a far better position than it was a year ago. He expressed the need for stimulus rollback and presented a roadmap for confinement of the fiscal deficit The central fiscal deficit is projected to come down to 5.5% in FY11 from a revised 6.7% in FY10. The government also laid out a medium term plan for fiscal consolidation, aiming to reduce the deficit to 4.8% in FY12, and to 4.1% in FY13. This is positive for the Indian equities as it lends visibility in improvement in sovereign rating and appreciation in INR. The Tax Proposal estimates an increase in the tax receipts by 15% and total revenues receipts by 8.54% over the revised estimates for last year– The government raised indirect taxes and reduced direct taxes, to come up with a net increase in revenues. The government increased excise duties by 2% as expected, rolling back some of the stimulus. Consumption and savings got a boost from the increase in income tax exemption limits as also the objective of also widening the tax base. An increase in Minimum Alternative Tax paid by companies from 15 to 18%, balanced by a cut in corporate income tax surcharge from 10% to 7.5%. Import duties on imported crude and diesel were increased by 5 percentage points. Service taxes were broad based to include more services in the tax including tax on construction linked payment for real estate. On the expenditure side, the planned expenditure estimates an increase of 18.38% and the total expenditure increases by 8.58% - Key themes remained a large increase in spending on the infrastructure, agriculture sector, increased allocation to NREGA and defense. The composition, in our view, is moving more towards investment rather than consumption, which we find welcome. The disinvestment target of about $9 billion (400 billion INR) and receipts from 3 G auction at $7.8 bn (360 bn INR) are a bit too steep in our estimate and think that the government will need to be very aggressive to meet that target. The withdrawal of stimulus in term of the excise duty rollback on various products and increase in excise duty on tobacco and big cars will have an inflationary impact as the same will be passed on the customers (Petrol and diesel price hike expected by day end today, Maruti today increased prices by Rs 3000-13000, others are expected to follow suit).

We believe that fiscal consolidation is coming on track and the government has taken its first steps for a partial roll back in the stimulus and the focus will now shift to monetary policy to remove its accommodative stance. The FM has done his bit, will the RBI governor follow suit.