Even before finance minister palaniappan Chidambaram rose to present his sixth, and the UPA government's fourth Budget, the benchmark index, Sensex, of the Bombay Stock Exchange was down more than 300 points, and by the time the stock market closed for the day, the index had plunged 541 points over the previous day's close. The fact that the Sensex opened 300 points down had nothing to do with the Finance Minister. It was merely mirroring what was happening at other stock exchanges around the world. The major European and Asian stock indices were down between 1.3 per cent and 3.72 per cent.

But the way it kept dropping after the Finance Minister finished his Budget speech had a lot to do with the Budget proposals. Under pressure from rising inflation and electoral setbacks to the major partner (Congress) in the ruling UPA coalition government, Chidambaram had swung one extreme-towards agriculture and the social sector. And the proposals that he announced for industry weren't anything that India Inc. had expected. He brought it companies (stock market darlings) under Minimum Alternative Tax, slapped an additional 1 per cent cess (on top of the existing 2 per cent) to fund secondary education and expansion of capacity for 54 per cent reservation, increased dividend distribution tax on companies from 12.5 per cent (excluding surcharge and education cess) to 15 per cent and widened the scope of the Fringe Benefit Tax to employee stock options as well. "We are dismayed to learn of the extension of service tax to areas like content provision, works contracts, commercial rents, etc., and also the new cess on corporate tax. At a time when the country has seen buoyancy in corporate tax collections, such fresh levies are disappointing," says Sanjeev Aga, MD, Idea Cellular.

India Inc., which was hoping for a slew of reformist measures to accelerate its momentum, was sorely disappointed. "We welcome the focus on agriculture, but are disappointed that the Budget did not infuse a "booster dose" into industry," R. Seshasayee, President, CII, and Managing Director, Ashok Leyland, told BT.

Playing it Safe

Continuity with a strong social sector fillip seemed to be the leitmotif of the Budget proposals. The background was clearly dominated by concerns of keeping inflation in check all the while making sure that growth too does not dampen. "Overall the Budget continues with the financial prudence mandate and attempts to keep prices stable," says Gautam Hari Singhania, Chairman & MD, Raymond Ltd. This play-it-safe attitude was not a major surprise given the popular discontent against inflation (especially food articles) that was evident in the state elections in Punjab and Uttarakhand. The Congress party got booted out of power in both the states just a day before the Budget was presented.

More allocations: But will it help the farmers?

Political imperatives accentuated the need to focus on agriculture-the straggler in the Indian growth story. As Chidambaram himself admitted, "average growth during the Tenth Plan period (2002-2007) is estimated at 2.3 per cent, which is below the desired level of 4 per cent a year". So clearly, this sector has to grow if India has to achieve double-digit economic growth. The Budget tried a combination of capital and revenue expenditure schemes to address some of the problems afflicting agriculture. "However, in the absence of any fresh capital schemes that could kick-start long-term growth in this sector, it is difficult to envisage a 4 per cent growth rate in agriculture in 2007-08, leave alone averaging a 4 per cent growth during the 11th Plan," says Siddhartha Roy, economic advisor to Tata Group.

And the Finance Minister well-deservedly claimed kudos for doubling farm credit in the last two years. This year, he gets more ambitious with a target of Rs 2,25,000 crore as farm credit and an addition of 50 lakh new farmers to the banking system. From a special programme in deeply distressed districts to an effort to boost seed production of pulses, the Finance Minister spent the first 15-20 minutes of his speech on agriculture.

One of the key new schemes to be proposed in the current Budget related to death and disability insurance cover for rural landless households through LIC-the Aam Aadmi Bima Yojana. Expected to benefit more than 1.5 crore such households, the cost of this scheme will be shared equally between the Centre and the states. In line with the UPA government's "aam aadmi" (common man) plank, Chidambaram made very visible increases in allocations towards education and healthcare-34 per cent and 22 per cent, respectively (see Mission Rural on page 24).

However, as Tushar Poddar, Vice President, Asia Economic Research, Goldman Sachs, points out, there is little sense in increasing allocations when existing allocations are left unused. Case in point is the education cess, where a fresh levy has been made even though the existing 2 per cent cess has not been fully utilised. "There is need to emphasise execution and delivery of existing resources before committing significantly more resources," Poddar says. A greater participation by the private sector could infuse much-needed efficiency in the delivery process, yet even that seemed to be a disappointment.

"Increasing the gross budgetary support is not going to convert into better delivery system without private participation in sectors like healthcare, education and infrastructure," says Kiran Mazumdar-Shaw of Biocon. In other words, while Chidambaram may have opened his purse-strings to tackle some pressing problems, he hasn't done anything to solve what has always been the problem with such expenditure-that is, insufficient focus on results.

Fiscal Consolidation

However, the Central government's spending plans were more or less along expected lines with an emphasis on income security for rural areas, says Sanjeev Sanyal, Director, Global Markets Research, Deutsche Bank. Spending has risen 14.9 per cent in the current financial year and the Budget targets an increase of 10 per cent in the next financial year. Despite no major spending cuts, fiscal correction has been on course mainly due to buoyancy in revenues-a result of galloping economic growth. Fiscal deficit is down to 3.7 per cent of GDP and the fm projects it will further go down to 3.3 per cent by the end of 2007-08-quite achievable, according to economists. But "this was the time to overperform on fiscal targets," points out Goldman Sachs' Poddar.

If Chidambaram has been able to splurge on agriculture and social sectors, it is because of the high octane growth that the Indian economy has witnessed in the last three years due to a fortuitous mix of global and domestic economic factors and a little help from continued reform process over the last 15-odd years. Reforms have brought in investment, fostered competition and enhanced productivity and efficiency. The economy is expected to grow at 9.2 per cent in the current financial year, and that too on a base of 9 per cent during 2005-06. Industrial growth for the April-December period stood at 10.8 per cent. Manufacturing, the main driver of growth, is expected to grow at 11.3 per cent during the current year.

WHAT ABOUT INFRASTRUCTURE? The accent is clearly on PPPs.

A long way to go: The thrust will be on privately-built and operated toll roads In his Budget speech, the Finance Minister acknowledged that the progress on public private partnership (PPP) infrastructure projects has been slow. In a bid to speed up the creation of bankable projects, the Finance Minister has proposed the setting up of a revolving fund with a corpus of Rs 100 crore. This fund will contribute up to 75 per cent of the cost related to project preparation by way of interest-free loan, which will eventually be recovered from the successful bidder. Details of the fund will, however, be announced shortly. In the power sector, the Union Power Ministry is to bid out two more ultra mega power projects by July (Sasan and Mundhra are two that have already been given out). Although allocation for the National Highway Development Programme (NHDP) has been increased from Rs 9,945 crore last year to Rs 10,667 crore in 2007-08, the thrust will be on privately-built and operated toll roads. And although the finance ministry has proposed allowing mutual funds to launch dedicated infrastructure funds, it remains to be seen how investors will react to it. However, a more significant proposal may be the one that seeks to set up two overseas subsidiaries of Infrastructure Finance Company Limited (IIFCL) that will tap India's forex reserves (via the Reserve Bank of India) and lend to Indian companies setting up infrastructure projects in India. Alternatively, the subsidiaries could co-finance their external commercial borrowings for capital expenditures outside of India, or provide 'credit wrap' insurance for raising funds abroad.

Exports are expected to close the year at over $125 billion. Within non-debt flows, in April-January period, foreign direct investment rose to $12.5 billion, outpacing portfolio investment at $6.8 billion. Foreign exchange reserves in mid-January stood at a more-than-comfortable $178 billion. Corporate profits have been growing strongly. Naturally, net direct tax collections up to January-end grew 41.2 per cent, outpacing the targeted growth of 27.5 per cent. The same is the case with customs (up 34 per cent till January) and service tax (up 64 per cent till December) collections. Excise is the only tax which is somewhat sluggish. "Chidambaram is surely quite lucky," quips former Finance Minister Yashwant Sinha.

Naturally then there were expectations that the government would announce deep cuts in direct taxes. However, the Finance Minister has chosen to remain circumspect and not leave any changes in the rates for a detailed Income Tax Bill to be introduced later this year. After all, populist pressures are expected to be stronger next year (general elections are due in 2009). However, the disappointment has been palpable. "The enhancement of Rs 10,000 in the basic exemption limit for personal taxation is too meagre and does not even take into account the rising inflation over the last two years," says Sanjay Bhatia, President, PHDCCI.

Inflation and Growth

Indirect taxes, however, saw some predictable and entirely expected cuts in a bid to clamp down inflation, which has reared its ugly head over the last six months. Average inflation in the current year ranged between 5.2 and 5.4 per cent. The cut in peak customs duty from 12.5 per cent to 10 per cent is expected to have a moderating effect on inflation by reducing the input costs of several import-dependent industries. The curious differential excise duty cut for cement manufacturers willing to retail below Rs 190 per 50-kg bag is also an attempt at reducing the rate of inflation. Manufacturers who hold the price line will be taxed at a lower excise rate of Rs 350 per metric tonne (compared to Rs 400 earlier) while others will be taxed at Rs 600 per tonne.

This proposal has met with all-round criticism and it is believed that it will lead to black-marketing and ad-hocism. "(This move) is not expected to control the rising cement prices-basic economics of demand and supply will overrule everything else," says Krishna Kumar Karwa, MD, Emkay Share & Stock Brokers. Notwithstanding these efforts, economists do not expect inflation to drop down significantly from 5.0-5.5 per cent levels in the coming year.

Lower tariff protection, tighter fiscal policy and high borrowing costs could slow growth in the next few quarters, believe economists. Deutsche Bank's Sanyal believes it could slow to the 7.5-8.0 per cent range for the next 18 months but is still not worried due to two reasons-improving fiscal situation and rising savings rate. According to the Economic Survey, the national savings rate jumped to 32.4 per cent of GDP in 2005-06-a substantial increase from around 24 per cent at the beginning of the decade due to demographic factors.

Yet, Chidambaram may also be accused of failing to make use of the opportunity presented by a buoyant economy and resurgent tax collections to make path-breaking, long-range reform changes. However, the consensus is that directionally Chidambaram has delivered a good Budget. That is evident from signposts such as allowing short-sales of securities by institutions and the introduction of exchangeable bonds for Indian business groups looking at internal restructuring, which would help unlock value. "Preparation of a road map for permitting institutions to short sell in the market could bring about the much-needed breadth and depth in Indian capital markets. It would lead to greater institutionalisation and reduce volatility in the market place," says C. Parthasarathy, Chairman, Karvy Group.

"On the whole, the Budget has done a good job of balancing political imperatives and economic compulsions. Although the Budget lacks concrete delivery mechanisms to generate accelerated growth, it has nevertheless not done anything adverse to derail the growth process," says Siddhartha Roy, economic advisor to Tata Group. And that's something to thank Chidambaram for.