Even though the economy has shown resilience in domestic macroeconomic fundamentals, it remains vulnerable to the recent global developments and internal inflationary concerns. Therefore, The finance minister has set a cautious yet optimistic tone to the budget, says Kaushal Sampat, COO, Dun & Bradstreet

The current Budget should be seen as a continuation to the sustained inclusive growth that the current UPA government has aspired to achieve over its tenure. The Budget attempts to consolidate and develop on the three key objectives of - inclusive growth, fiscal consolidation and building a knowledge society.

These three objectives are manifested in the current Budget through the continued thrust on agriculture, education, healthcare and infrastructure. The coherence of the reform initiatives of the UPA government is reflected in the Budget's overall alignment with the 11th Five-Year Plan.

Some major Budget initiatives: 

POSITIVES:

Public sector

• The initiative by the government to provide Rs164.36 billion as equity support and Rs30 billion as loans to central public sector enterprises (CPSEs) is a welcome step.
• The government is planning to list more CPSEs and we confirm the finance minister's belief that this will unlock their true value and improve corporate governance.

Monitoring and evaluation

• The finance minister's recommendation to put in place a central plan schemes monitoring system (CPSMS) will help address the dismal implementation state of projects in the country.
• The CPSMS will be implemented as a plan scheme of the Planning Commission.
• A comprehensive decision support system and management information system will also be established.
• The intended outcome is to generate and monitor scheme-wise and state-wise releases for about 1,000 Central Plan, and centrally sponsored schemes in 2008-09. This is a much needed step.

Social sector (health & education)

• The focus on building India as a knowledge society is something that is reflected in the increased allocation to education by 20 per cent. The thrust to the education sector will go a long way in addressing the skill gap being witnessed by India Inc.
• The decision to set-up 16 central universities, three more IITs, two IISERs and two Schools of Planning and Architecture during 2008-09 is an initiative in the right direction.
• The allocation of Rs131 billion in Sarva Shiksha Abhiyan and Rs850 million for the launch of a new scheme named Innovation in Science Pursuit for Inspired Research (INSPIRE) will further strengthen the knowledge base of future India.
• The thrust to the healthcare sector is displayed in the increased allocation to the sector. We believe that this thrust to the social sector will translate to an enhanced quality of life for Indian citizens in the medium to long run.
• The Budget has increased the allocation to the healthcare sector by 15.1 per cent from Rs143.63 billion to Rs165.34 billion.
  · Important highlights:
  • Allocation of Rs63 billion in Integrated Child Development Services (ICDS).
  • Allocation of Rs10.42 billion for Polio eradication measures, especially in high-risk states such as Uttar Pradesh and Bihar
  • A five-year tax holiday to encourage hospitals to be set up anywhere in India

Infrastructure

• The infrastructure sector has been the most critical determinant of sustainable, higher growth. The Budget carries the momentum set-up by the Eleventh Five Year Plan by increase in allocation for the sector mainly in terms of the following key initiatives:
  • Corpus for the Rural Infrastructure Development Fund (RIDF) XIV raised by 16.7 per cent to Rs140 billion in FY09.
  • Allocation for Bharat Nirman raised by 27 per cent to Rs312.8 billion in FY09.
  • In addition to the fourth Ultra Mega Power Project (UMPP) at Tilaiya the government has proposed to bring five more UMPPs in Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamilnadu to the bidding stage provided the States extend the required support. We believe that this is an important initiative and will go a long way in addressing the power deficit in the medium to long term.

Direct taxation 
The increase in the tax exemption limit and relaxation of the tax-slabs will increase the disposable income of the income tax payees by Rs4000 to Rs45000, which will definitely spur domestic consumption demand and/or add to the Gross Domestic Savings (GDS).

Impact on corporate sector 

• Union Budget 2008-09 is likely to have a positive effect on the bottom-line of corporate houses.
• On the indirect taxes front, reduction in CENVAT to 14 per cent from 16 per cent and excise duty reduction across different sectors is expected to reduce costs for manufacturing companies and thus improve their profitability.
• Reduction in indirect taxes for consumer goods is expected to lower the prices, which would spur the consumption demand.
• With no changes in the corporate tax rates, reduced indirect tax burden would improve the profitability of corporate houses.
• On the direct taxes front, though the corporate tax rates remain unchanged, there has been minor relief with respect to fringe benefit taxes (FBT), as organising sports events for employees and guest houses have been excluded from the purview of FBT.
• Another positive move has been the removal of double taxation effect of Dividend Distribution Tax (DDT) in case of dividend received from the subsidiary company.

We believe that the impact of the Budget on the various sectors to be mostly positive. The sector impact is summarized in the table below.

CONCERNS:

• The single most important concern that has arisen out of the Budget has been the debt waiver of Rs600 billion for agricultural loans disbursed to the farmers. The Budget has been silent on the financing aspect of this waiver.
• However, we believe that the write-off is likely to have an adverse impact on the fiscal front for the government and/or the banking sector. Further this could set a wrong precedence towards financial market discipline thereby increasing the tendency for further defaults.
• SEBI has issued draft Real Estate Investment Trust (REIT) guidelines in November '07, but there is no clarity on tax pass through benefits. It was expected that the finance minister would provide tax breaks on REITs, similar to those provided for mutual funds.
• The Sixth Pay Commission is expected to submit its report by 31 March 2008. The Budget does not elucidate upon the means of financing the increase in expenditure on account of the possible implementation of the Sixth Pay Commission recommendations.

The Budget generates largely positive sentiments in terms of corporate earnings potential, and investment scenario, be it capacity creation or domestic capital formation. The Budget has taken the favourable and opportune economic environment by prioritizing resource allocation towards long term sustainability, through productive asset creation and addressing the skill gap that are needed to put India on a phase of continued high growth.

Summing up, Sampat says that the Union Budget 2008-09 continues to walk the path of sustained economic reforms, laying emphasis on agriculture, education, healthcare, and overall infrastructure. It will be able to spur a positive reaction across all segments and strata of the society, be it a common salaried person, or small & marginal farmers.