Budget expectation: IDBI Federal Life Insurance

Current year’s budget would be carefully watched for key policy announcements & government’s approach towards a fiscal consolidation.

The Union Budget 2011 would be presented on the back drop of rising inflation, high current & fiscal deficit and slowing down growth. This makes the budget exercise much more complicated. Current year’s budget would be carefully watched for key policy announcements & government’s approach towards a fiscal consolidation. Expectations on Policies Inflation Policy announcement to control inflation would be the most important one. Part of the high Indian inflation is due to rise in global crude and commodity prices but on the other hand, domestic supply bottlenecks & lack of agriculture sector reforms are also causing inflation which can be avoided by addressing supply side issues and promoting policies for cold storage chains, APMC Act, reduction of import duties on food items & food processing equipments and several other initiatives. Subsidies India had budgeted for Rs. 1,16,000 cr for subsidies, but the actual subsidies are expected to cross 1,65,000 cr. The approach of the government towards subsidies is important to rationalize consumption and control the fiscal deficit. Implementation of food subsidies policies targeted towards the poor needs attention. Nature & form of Food Security Bill would determine the exact amount required for the same. There is a possibility of additional grant of Rs. 25,000 to Rs. 40,000 cr required for the same, although the same may not be appreciated by markets. Farm gate prices of urea should be partly decontrolled and producers should be provided import based price. At the same time, since India imports large amount of urea, it has become necessary to provide schemes to promote investment in this sector. It would be difficult to do away with oil subsidies, given high crude prices and cascading impact of the same on inflation, but reduction of import duty & excise duty on crude & oil products is not ruled out. Infrastructure Sector Infrastructure sector also needs attention of government as there is a severe shortage of long term funds at reasonable cost. We may see increase in limit for infrastructure bond for tax benefits from Rs. 20,000 to Rs. 50,000. Land acquisition and environment clearance has remained other major hurdle for efficient execution of such projects. Land Acquisition (Amendment) Bill would facilitate easier acquisition of land for industrial & infrastructural activity. FDI To handle current account deficit it is necessary to give boost to certain sectors and at the same time it is necessary to have attractive FDI policies to finance trade deficit. Relaxation of FDI limits in insurance & retail sector would be a welcome move. Expectations on Fiscal Consolidation Market would keenly watch measures taken by government to contain fiscal deficit and would be more interested in knowing about expenditure control than revenue enhancement measures. We expect that excise duties & service tax hike by 2%. Roadmap for implementation of DTC and partial implementation of GST is also expected. Divestment targets of government may not be achieved this year however we would not be surprised to see higher target of Rs. 50,000 crores for next year. Amnesty scheme or some form of VDIS may also find place in budget to boost revenue for government. Overall, Fiscal deficit of less than 4.8% with targeted GDP growth of 8.5% & net government borrowing of less than Rs. 3,50,000 crores would bring smile on investors’ face. Aneesh Srivastava, Chief Investment Officer IDBI Federal Life Insurance Company Limited