What clues does Pranab’s Interim Budget hold for today?

05 Jul

As the country gears up for Budget 2009, Moneycontrol revisits the Interim Budget presented by Finance Minister (FM) Pranab Mukherjee in February this year. The Interim Budget, which was presented just before the country went into general elections, possibly set a tone to what might be achieved if the UPA government were to return to power. So as the FM rises to make his full budget speech today, let us look at a possible trail that the Interim Budget left behind, which may be retraced today.

One of the key focus areas of the Interim Budget was investment in infrastructure. Accordingly, the Government had decided that India Infrastructure Finance Company Ltd. (IIFCL) would refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next eighteen months or so.  For this purpose, IIFCL had been authorized to raise Rs 10,000 crore in the market by the end of March 2009.  An additional Rs 30,000 crore was allowed to be raised if required. Mukherjee had said in his speech,”Combined with the steps we are taking to increase public investment in infrastructure, this will provide a big boost to such investment.”

A possible way for increasing public investment in infrastructure is to allow tax sops for investment in infrastructure companies. This is in line with pre-budget expectations of most experts who expect the tax deduction limit under section 80C to be increased from the existing Rs 1 lakh in order to accomodate specific sops for infrastructure investment. As tax expert Subhash Lakhotia points out, “Tax payers should be granted higher deduction and exclusive deduction in respect of investment in infrastructure bonds. This will boost infrastructure investment. It is expected and it is felt that a large sum of money can be gathered by the government for the development of infrastructure in the country by providing a special tax benefit by way of an exclusive deduction under section 80C for investment in special infrastructure bonds.”

In his interim budget speech, Mukherjee had said, “The favorable economic environment created by the reforms of 1990s gradually inspired the confidence of foreign investors in our economy, leading to rise in capital inflows. India has evolved a liberal and transparent policy for Foreign Direct Investment (FDI). Except for a small negative list, FDI is allowed mostly on the automatic route.  To provide an impetus to foreign investment in India, guidelines are being further simplified and made homogenous and consistent across various sectors.”

Increasing FDI in insurance is something that has been long talked about. And experts across the industry are looking forward to action on that front. As Ajay Bhimbhet, MD Of Royal Sundaram Insurance puts it, “A higher foreign direct investment (FDI) will unshackle the insurance industry and drive growth and long-term development, enrich the business by bringing world-class business practices and processes, expand distribution capabilities and deepen market penetration.Over Rs 10,000 crore of foreign capital could flow into the country if the government were to pass the Insurance Amendment Bill that raises the FDI  limit.”

The FDI is currently 26 per cent and industry experts are hoping that it would be increased to 49 per cent.

“Extraordinary economic circumstances merit extraordinary measures.” With that, the FM had, in the interim budget, set a tone for what ought to be done by the new government. He said that the UPA government had decided to relax the FRBM targets, in order to provide the much needed demand boost to counter the situation created by the global financial meltdown. And that it was up to the regular budget to consider additional fiscal measures, depending on the response on the response of the domestic economy.

Some serious attention to FRBM can therefore be expected from this budget and disinvestment is what most experts are talking about. The economic survey too had several recommendations with respect to disinvestment. It set a target of Rs 25,000 crore per year for disinvestment. The key points: offloading at least 10% equity by listing unlisted PSUs and auctioning off loss-making ones.

Apart from this the FM stuck to UPA’s aam aadmi mandate and promised to further the ‘inclusive’ growth agenda. whether the budget will actually deliver on these is something we will know on July 6.


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Posted by on July 5, 2009 in Business


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