Dinesh Thakkar, Chairman & Managing Director of Angel Broking, says government will look at lowering the fiscal deficit target to improve the country's ratings outlook.
Given the current challenges, what, in your opinion, would make for a good budget ? What measures or proposals would you like to see?
Apart from the high fiscal deficit, the economy is also running an uncomfortable current account deficit. This makes the threat of a downgrade by rating agencies more pertinent due to the risk of foreign capital outflows on account of such a downgrade. So, I believe the key focus of the government will be to have a credibly lower fiscal deficit target to improve the country's ratings outlook. The other key priority of the government is to bring down domestic inflation and interest rates, so as to revive the investment environment in the economy and give a boost to GDP growth. Importantly, the government has taken some unpopular but economically beneficial policy measures since September 2012, and I expect the reform momentum to continue, without the government resorting to undue populism, at least in this budget.
Given the constraints the government faces in raising revenue, do you see a case to increase income tax rates on the rich?
The economic slowdown has led to a deceleration in the tax revenue to GDP ratio in the past couple of years. While in the near-term, there might be a case to raise marginal tax rates or levy cess on income-tax for the super-rich, in the medium-term the focus should also be towards expanding the tax-base and ensuring stricter compliance. Going ahead, I do believe that India's fiscal deficit, as compared to developed countries also facing a high fiscal deficit, is less of a problem due to our being a high growth economy. So, in the medium-term, due to our higher economic growth, our tax revenues will rise and the deficit can be brought to a healthier and more manageable level, as was witnessed in the 2004-2008 period.
If the budget does not meet expectations, do you fear that business sentiment would once again dip? What is your worst fear?
Well, in the recent couple of months, the government has bitten the bullet and successfully delivered on the policy measures indicated by them, substantially increasing credibility regarding their commitment to reform. Considering the serious focus to attract foreign capital to plug our large current account deficit, I believe the government will deliver in the budget, too. Any big-bang announcements would be the icing on the cake, but at the very least I expect the government to exercise fiscal prudence. So, I'm fairly confident that the improved outlook we have witnessed in the last few months is unlikely to be reversed on account of any untoward negative surprise in the budget.
Specific to sectors such as infrastructure, power, gas , taxation and social development, what could the current budget do to improve conditions?
Infrastructure is expected to be one of the focus areas, as reviving the investment cycle remains a priority. More importantly, I believe the government should expedite structural reforms to remove supply-side bottlenecks in the economy. And in that context, clarity is needed urgently on coal block allocations and removing hurdles to mining. While our large import bill is to a good extent on account of oil and gas imports, which are unavoidable, it is unfortunate that in spite of our large coal reserves we are wasting precious foreign exchange on large coal imports too. Inadequate coal availability is jeopardising billions of dollars of investment in our power sector. In the context of the widening current account deficit, some sops for our export sectors are also likely. I also expect greater clarity on the roadmap for implementation of long-pending tax reforms - the GST and DTC - and the way ahead for the direct cash transfer programme. On the social sector side, apart from MGNREGA, although the government is committed to the objective of food security, I believe the legislation is likely to be introduced closer to the 2014 general election since curtailing the subsidy burden is the prime concern at this juncture.
Which budget, in the recent past, do you remember as having been a good one?
For a long time before September 2012, the government was gripped by policy inertia, and in my view, the recent budgets, too, were largely neutral non-events. The actual fiscal deficits exceeded budgeted estimates by large amounts. As mentioned, I expect this (2013/14) Budget to be a prudent one, with fiscal consolidation at its core. Overall, I expect this budget to be positive for markets. The markets will keenly analyse the budget to see if it sets credible targets, with clarity on the roadmap to achieve those targets.