After the euphoria surrounding the central election results earlier in the year, much was expected of Finance Minister Pranab Mukherjee’s budget speech. Enthused by the Congress’ near majority in Parliament, the ambitious 100-day agendas of some ministers and the appointment of Nandan Nilekani to cabinet-equivalent rank, many analysts expected the budget to signal a push towards greater financial reform, improved governance and economic liberalisation. Those hopes have been belied, albeit not entirely betrayed, as the FM chose to play it safe by delivering a sober, middle-of-the-road budget.


The Finance Minister must be commended for resisting the temptation to increase tax rates, despite the burgeoning fiscal deficit and the shortfall in advance tax collections. The decisions to remove the surcharge on personal taxes, remove FBT and extend STPI signaled a belief in a low tax regime that augurs well for the long term. The increase in MAT does not run contrary to this approach because it is effectively an advancement of tax rather than an increase in tax incidence.

The FM’s statements (or lack thereof) about the GST rollout by April 2010 were, for me, a big disappointment. While he paid lip service to the rollout target of April 2010, he did not lay out any credible roadmap nor did he convey any urgency towards addressing the many unresolved issues that are likely to delay the GST rollout.

The introduction of VAT a few years ago has been an unqualified success in boosting tax compliance and reducing tax complexity for SMEs. A successful rollout of GST, especially if it completely replaces other taxes such as octroi, will usher in nothing short of a revolution in the domestic market.

Stimulus packages and the fiscal deficit

The FM announced a slew of spending measures aimed at the rural masses and the economically disadvantaged classes. No responsible citizen can argue with the intent of these schemes and the desirability of inclusive growth. However, it remains to be seen how much of this largesse reaches the beneficiaries it was intended for.

It was not that long ago those subsidies were widely condemned as being wasteful and non-productive. Recessionary times have allowed this populist largesse to be rebranded as “stimulus packages” and some of these schemes have been credited with turbo-charging domestic rural demand through the current global slowdown. Mr. Nilekani’s unique identification number project shall have an important role to play in ensuring that these mind boggling sums of money actually reach the right beneficiaries.

Of course, these stimulus packages come at a price. The FM’s projection of a 6.8% fiscal deficit is reason enough to worry; the bigger fear of course is that even this projection is based on rosy assumptions about tax collections. The FM is betting on the Indian economy’s robustness - he can hope to meet his fiscal deficit targets only if the economy’s growth rate picks up and corporate earnings increase. His calculated bet may well pay off, but he will need to keep a close watch on the fiscal deficit throughout the rest of this government’s 5-year term. 

Divestments and the capital markets

The capital markets were hoping that the FM would announce aggressive targets for the disinvestment of public sector stakes and a removal of the Securities Transaction Tax. He did neither. While a delay in divestments has no direct impact on most sectors of the economy, a large divestment program would have energised the IPO market in general and allowed private firms to raise equity capital alongside the PSUs.

Further, a large divestment program would have allayed fears about the fiscal deficit and the threat of the government’s borrowing program crowding out private sector borrowing. I hope that the FM’s decision to de-emphasise this issue in his budget speech reflects a conscious attempt to shift this potentially divisive issue out of the limelight rather than a lack of conviction in the principle of disinvestment.

Signaling strategic intent: the big disappointment

The biggest disappointment for long term investors, including the PE/VC community, is that the FM did not use this highly watched speech to articulate his vision of economic reforms and the next stage of the liberalisation process. In India, the budget speech is not just about tallying expenses and revenues, but is also a stage for the government to announce strategic initiatives and clarify its long term intent.

The FM could have chosen to announce important decisions - initiatives to make public-private partnership in infrastructure easier and faster, ways to attract more foreign capital to sustain our growth rates and further de-regulation of restricted sectors. The FM chose instead to simply pay lip service to these topics and to decline/defer major policy announcements.

Foreign investors looking for cues on whether this government will create an atmosphere more conducive to their capital will have to wait either for major post-budget announcements or else until Budget Speech 2010, which is a mere 8 months away.

We cannot take our GDP growth rate for granted. If the FM does not take the lead in removing structural impediments to growth – a complicated tax regime, vested interests in infrastructure, impediments to foreign capital, then we could lose the golden opportunity presented by a stable government that doesn’t rely on the Left for support. India deserves better.

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