The Hindu Business Line : Signalling stability

The Budget reflects the bullishness of the Finance Minister on the Indian economy. The gross budgetary support has been increased by 20.4 per cent while the fiscal deficit target has been reduced to 3.8 per cent.

This reflects the Finance Minister's optimism of a buoyancy in revenues from increased economic activities, the enhanced and expanded service tax and also from a deepening of the tax base through improved compliance. The reduction in the estimated fiscal deficit number for financial year 2005-06 from that planned last year (from 4.3 per cent to 4.1 per cent) also supports this.

While many may complain about the absence of new ideas in the Budget, indeed, this is the most positive feature as it signals the Finance Minister's intention to provide long-term stable policies that are crucial to business growth and investor confidence. The intention to move to GST (Goods and Services Tax) by 2010 is yet another indication of policy stability. While budgetary support is up, most of this increase is going towards Plan expenditure. The increase in the non-Plan expenditure for financial year 2006-07 has been curtailed, and has been budgeted only 5.5 per cent higher than the previous year.

One area of concern, which has not been addressed, is the question of the availability of capital to fund infrastructure projects. Interest rates in India are already beginning to harden, with credit off-take outstripping deposit growth. The Finance Minister has not indicated how interest rates, and therefore the cost of capital, will be kept low without which large infrastructure investments are not feasible.

However, in summation, the Budget 2006-2007 is very positive for (a) signalling a stable policy regime, (b) for fiscal consolidation, and (c) for a basic belief in growth that is inherent in all the assumptions.

(The author is Executive Vice-President and Head - Strategy & Business Development, DSP Merrill Lynch Fund Managers)