Preparing for the next phase of growth

28 Feb 2007

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The continued moderation of customs and excise duties will make Indian industry more competitive, says Milind Barve, managing director, HDFC Mutual Fund.

Milind BarveThe union budget aims at striking a balance between sustained economic growth, inflation and the social objectives as laid down by the NCMP. There has been a renewed thrust on agriculture, rural development programs, infrastructure spending and employment generation programs. While the budget has laid major stress on agriculture, education, employment and health / welfare schemes, the implementation of these projects will be critical in the achievement of these objectives.

The government is targeting a higher GDP growth rate of 8 per cent-10 per cent on a sustained basis and has recognised the need for a renewed thrust on infrastructure investments in order to achieve these objectives, and the proposed use of our foreign exchange reserves for this purpose is quite significant in that respect.

There is also the recognition that inorder to achieve the targeted growth rate, increased emphasis will have to be given to the agricultural sector and rural infrastructure as this sector employs over two thirds of the work force and contributes 20 per cent of GDP. The importance and role of the financial sector as an efficient delivery mechanism has been recognized, and efforts to create a more robust environment for their functioning is very progressive.

One of the positives of the budget has been the further moderation of customs and excise duties with an aim to make industry more competitive. The successful implementation of VAT and phased reduction of CST is a major positive as demonstrated by the robust collections. The scope of service tax has been expanded and is gaining importance as a major revenue generator.

On the direct taxation front, the 1 per cent additional cess on all taxes as well as the increase in DDT by companies and money market and liquid funds is a negative step and has no significant impact on revenues of the government.

The reduction of tax concessions is a necessity in order to create a level playing field, however we feel that the emphasis should be on increasing the tax base and compliance levels rather than frequent tinkering with taxation levels. With respect to the Mutual Fund industry we are pleased with the proposal to permit MFs to launch and operate dedicated infrastructure funds and with the proposal to permit individuals to invest in overseas securities through Indian mutual funds.

Overall, the budget has maintained continuity of policy in key areas, however its attempt to tackle higher inflation seem rather hap hazard. On the positive side, it has tried to adhere to revenue & fiscal deficit targets, moderate tax structures and have attempted to provide an enabling environment for achieving and maintaining a higher growth rate.

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