Anand Krishna’s musings

The Union Budget to be presented by Finance Minister P C Chidambaram in a week or so will be his last as part of the current UPA government, assuming that the Lok Sabha elections are held on schedule.

Every year, the Budget is a huge event that shapes not just macro-economic and fiscal policies, but also sets the tone for how the stock markets are likely to behave. In fact, right from the first week of February, the stock market takes cues from second-guessing what the Finance Minister is likely to unveil.

In the last couple of budgets, the FM has acted on expanding the tax base. New services have been brought under the service tax net. However, agricultural income remains outside the income tax regime and this continues to benefit several large farmers. Excise duty cuts and sales tax rationalization hve also occurred over the past few years, and these are laudable. However, the introduction of levies like the FBT have raised more than a few hackles. Extending the tax breaks for India’s IT and ITES industries is something else that needs careful consideration. While the industry has matured and at least the large players no longer need fiscal breaks, it cannot be denied that these breaks attracted initial investment and these in turn helped create the ecosystem that is today India’s source of advantage via-a-vis some other destinations. The budget must also encourage Public-Private Partnerships to accelerate urban and rural infrastructure development. By “infrastructure”, I do not just mean roads, power and airports; I also mean schools, drinking water, sanitation and healthcare.

The FM has a great chance to use the budget to drive GDP growth past the magical 9% mark. But there will also be electoral compulsions to come out with a populist budget, so that the Congress can piggy-back on its “feel-good” wake and try to win the upcoming elections.

What choice the good Dr Singh and “PC” (Mr P C Chidambaram) make will be decisive in how fast India continues to grow. In the short term, the budget will also impact stock market sentiment, especially at a time when the dark clouds of US slowdown are looming large on the horizon.