At a time when the economy is expected to report its slowest growth (in FY13) in a decade, savings rate has fallen and the government's balance sheet is in bad shape, leading market players say the Finance Minister has a tough task of striking a balance between economics and politics, specially because the country is headed for general elections next year.
However, post the recent favourable measures and the consequent rally in stock market, most market pundits are now hoping that the FM will focus on reviving economic growth and boost investor confidence, while providing a clear road-map to bring down the government's fiscal deficit.
Says Motilal Oswal, CMD, Motilal Oswal Financial Services, "I expect Mr. Chidambaram to take decisive steps to turn the economy around and create a more investment-friendly climate."
Says Nirmal Jain, Chairman, IIFL, "We believe the Budget will provide fresh impetus to the market to scale new highs. The Finance Minister is expected to deliver a reform-centric Budget and will try and achieve the fiscal deficit targets".
Among various steps to revive growth, Nimesh Shah, MD & CEO, ICICI Prudential AMC, says, "The clear requirement from the government is kick starting the investment cycle that is now imperative for driving growth. From a sectoral perspective we expect sops for the export sector given that current account deficit has been under pressure."
While the market is looking forward to additional sops for exporters, they are also hoping for concrete measures for boosting spending and measures towards faster project clearances as well as addressing bottlenecks in the infrastructure sector.
Says Rakesh Arora, Managing Director & Head of Research, Macquarie Capital Securities, "The government's effort to boost infrastructure investment is a theme that has carried forward from last year's budget. Some proposals to ease financing have already been allowed. Some investment-linked incentives may also be provided. Industry bodies have proposed abolishing MAT for the infrastructure sector since it has been going up over the past few years, is not significantly lower than the corporate tax rate and nullifies the positive impact of investment-linked incentives." While Arora believes that the tax holiday for power sector projects should be extended beyond March-end 2013, additional measures (apart from those announced recently) in power and road space are also required.
As a step forward, majority of experts also expect the FM will provide incentives to boost the country's saving rate, without which it will be difficult to prop up economic growth rate of the country.
Says Madhu Kela, Chief investment strategist, Reliance Capital, "The biggest challenge today is to increase our savings and ensure they are deployed in productive financial assets." Kela estimates that savings, which stood at 37 per cent of GDP in FY08 is down to 30 per cent in FY13 -- in other words, savings are down by Rs 7 lakh crore or around $130 billion, wherein household savings are down the most.
The government, hence, needs to focus on improving savings rate and come up with measures to direct the household savings into financial savings which could then be mobilised into productive investments. Among options, Kela says, "If there is a tax-free infrastructure bonds that can collect say, Rs 50,000 crore. Then, a part of your infrastructure financing problems could be addressed."
He adds, "If you want over 8 per cent growth, the investment rate has to be upward of 35 per cent of GDP. Unless "productive domestic savings" rise, growth will automatically come down to 6 per cent as we don't have resources for 8 per cent."
Hence, experts believe that individuals will be given tax incentives by way of higher income tax exemption and possibly, higher deduction under section 80C.
Overall, the underlying sentiments are pretty clear with respect to the need to revive growth rates and importantly, curbing the fiscal deficit. Expectations are that populist measures should also take a back seat for some time at least, till growth revives. Experts hope that planned expenditure should not be cut if capex has to revive even as they are agreeable to increase in taxes for certain segments to shore up the government's finances.
Says Rashesh Shah, Chairman and CEO, Edelweiss Group, "On the expenditure side there will be pressure for increased government spending. However, the need of the hour is to boost long term investments and restore investors' confidence. Once growth rate inches up above 7 per cent, we can introduce more social spending schemes."
Shah of ICICI Prudential AMC, says, "Budget 2013 is going to pit economics against politics and striking a balance between the two is what is required. We would therefore hope for reduction in revenue deficit and not a reduction in investment expenditure on the part of the government through steps like increasing taxation and reducing subsidies, etc."
For shoring up finances, there are various avenues including the traditional route of raising taxes on cigarettes, alcoholic beverages, etc. or even raising the MAT (minimum alternative tax), feel experts. Among the non-traditional ways, the FM could continue to look at disinvestment, sale of surplus government land, special dividends from cash-rich PSUs as well as spectrum auction to name a few.
What's equally important is that the plan to cut deficit should be credible, which will boost market sentiments and support the country's rating.
In a note on Budget expectations, Nandan Chakraborty and Sachchidanand Shukla of Axis Capital say, "The FM has already stolen his own thunder by announcing a slew of measures outside the budget. Focus will now be on Stability, Credibility on fiscal consolidation and Reform intent in order to reposition India as an attractive investment destination". They add that fiscal deficits cannot be tackled in one year and it is the trajectory that matters. Thus, the budget should stress on revenue increases without hurting growth, expenditure control, quality of fiscal adjustment (FM should cut wasteful expenditure, rather than capex to look fiscal deficit better), roadmap for key bills and propping savings.
There are other implications if the fiscal side is not managed well. Says Dinesh Thakkar, Chairman & Managing Director, Angel Broking, "I expect the Finance Minister to stick to his indicated fiscal deficit target of 4.8 per cent of GDP for FY2014 since macroeconomic stability is pertinent for averting a possible sovereign ratings downgrade."
In this backdrop, expectations are that sectors like FMCG and Retail (due to focus on NREGA, Bharat Nirman, higher tax incentives to individuals, clarity on GST) and infrastructure (increased allocation, tax incentives, easy funding, faster project clearances). While some believe that the oil & gas producers will benefit due to likely re-imposition of import duty on crude oil, many believe that cigarettes and auto segments could see an increase in duty rates.