Good growth prospects for India expected to be revealed in Budget this week

News - Tax

Written by Ray Clancy

Monday, 22 February 2010 09:16

Ending the fiscal stimulus, tackling India’s deficit and introducing a unified tax system are the key announcements investors will be hoping for in the Indian government’s annual budget due at the end of this week.
The Union Budget will be the second since last year’s general election in India and one of the most important in recent years as it looks set to focus on big policy initiatives. Investors have been cautious in recent weeks as they await the Budget and according to Nitin Jain, principal fund manager Long Only strategy, at Kotak Mahindra (UK) the measures likely to be taken will have a significant impact for sustainable growth in the middle to long term.

‘The stimulus package introduced by the government in response to the global financial crisis has boosted domestic demand by keeping more money in the hands of consumers. But the economy is now performing much better and we expect to see most of the stimulus withdrawn in this budget,’ he explained.

He has found that many investors have become concerned about India’s fiscal deficit. ‘Whilst better than expected economic growth will help reduce the deficit anyway, we expect the government to announce measures which will tackle it directly. One likely measure is the reduction in fuel subsidies. The government currently spends hundreds of millions of dollars every year subsidising the price of petrol, kerosene and gas. Given oil prices have fallen from the highs of the last two years this seems like a good time to start reducing this burden on government expenditure,’ said Jain.

Markets would also be keenly watching the extent of the stake sale programme in state owned companies, proceeds of which will go towards reducing fiscal deficit,’ he added.

Government ministers have been dropping heavy hints towards a withdrawal of fiscal stimulus. ‘More of a push on reducing the deficit and correcting the structure to something more neutral will play well in the markets. That said, a degree of stimulus will need to remain in some areas,’ said Jain.

‘Alongside other likely measures like introducing a unified Goods and Service Tax, reforming social security, and tackling inflation, these measures will help lessen the possible impact of future risk and encourage corporate investment, which is India’s biggest growth driver,’ he added.

A road map for roll out of unified Goods and Service Tax (GST), for the manufacture, sale and consumption of goods is expected to be announced in the budget. The proposed tax will replace the current system where each state in India has its own sales tax set at different rates. The GST will be shared between Central government and individual states in order to remove loopholes, remove anomalies in the way the manufacturing and service sectors are treated, and make tax easier to collect.

Other big policy announcements may relate to infrastructure, agricultural reform, and energy, perhaps with an announcement on investment in expanding power generation capacity, notably through nuclear and wind technology. On the Infrastructure front, India has already seen a lot of activity on the road sector in the last couple of months.

‘The budget will need to look beyond current global difficulties such as the recent heavy selling by foreign investors worried about the Eurozone economies. While the next six months might be noisy, we expect the year to bring GDP growth of around 8%. A gradual exit from fiscal stimulus will do a lot to consolidate the platform for reform promised by the Indian government and lay the foundation for faster economic growth,’ concluded Jain.