Considering 2014 is an election year, the government may be under pressure to present a populist budget. On the other hand, there is pressure from rating agencies, a high fiscal deficit, record current account deficit and inflation concerns, which cannot be ignored. This suggests that we may see a balanced budget. The government should focus on reviving growth even if it has to take some hard measures. Long-term, solid growth can be maintained if the budget allocates more resources to education, infrastructure, power and basic needs.
Some positives are emerging as the government has already initiated the reforms process. For example, opening multi-brand retail and partially decontrolling diesel prices are very good moves. The government may have to come up with some measures to rationalise subsidies. There is a need to accelerate the reforms process to bring the fiscal situation under control. Disinvestments should start early considering capital markets are showing some strength.
India's current account deficit has widened to a record high, which is a major concern. The recent hike in the import duty of gold is a welcome step that will help bring down the deficit.
The capital market would like to see the budget targeting problem areas. Capital markets need stabilisation and the backing of major Indian institutions such as PFs. These institutions should be allowed and encouraged to invest a small portion of their portfolios into equities. Short-term capital gains tax on stocks and mutual funds should be abolished as it will bring liquidity into Indian markets.
India cannot grow in a vacuum and we require a regular flow of foreign investments. It is very important to maintain the confidence of foreign investors at this stage. The budget should avoid any goof-ups. For example, retrospective taxation clauses in the past hit foreign investments. It is a proven fact that FIIs (foreign institutional investors) have been helpful in expanding Indian capital markets. FIIs should be allowed to invest freely in India and capital markets should be opened to foreigners in a phased manner. Currently foreign investors are routing almost all their investments through tax havens such as Mauritius.
There may not be a major change in income tax slabs but there could be some minor adjustments to tax the super rich. The government will still have to look for sustainable revenue sources, as higher tax rates on the super rich may not be a very good solution for the long run - it is very easy for HNIs to park their wealth in tax havens. Tax structures should be made much simpler and there should be measures to bring the maximum number of citizens under the tax net.
Sanjeev Bhalla is head of equities and alternatives at Bank of Bahrain and Kuwait
(As told to Sarika Malhotra)